You cannot use standard costs for any kind of decision-making. And yet ….. most companies do. If we are going to make important decisions – like quoting orders, make/buy, capital purchases – we must have clear, correct, and comprehensive information. Traditional accounting has none of these.
In this blog, I will make the case for why using box scores should be THE STANDARD WORK for making business decisions in Lean companies.
In my previous blog in this series (Click here to read it) I put forth the proposition that “If you are motivated to change something, improve it, or eliminate waste from the process, you have to be able to see what’s happening.” Box score decision-making gives you this.
What’s Wrong With Using Standard Cost?
When it comes to decision making there are very big differences between traditional accounting and Lean Accounting. These differences are mostly caused by the fact that standard costs are inveterate and unabashed liars. If you make decisions using standard costs (or any fully absorbed costs) you will be misled by the numbers.
The crux of the problem? Standard cost improperly allocates “labor and overheads.” There’s a good example in Part 1 of this series (Lean Accounting & Traditional Accounting Compared Part 1 – COSTING) where two products have different standard costs, but it’s obvious their costs are the same. There is also a stark example in a recent blog I wrote about GM and Chrysler (Absorption Costing is the Enemy of Lean. Chrysler & GM Proved It in 2008) where two very sophisticated companies bankrupted themselves because they believed the absorption of overheads.
- Traditional costing does not address the value stream. It focuses on summing up activities and tabulating performance from separate work centers; this is the opposite of Lean. It is almost impossible for a company to embrace and sustain Lean if accounting and measurements are undermining the culture of Lean itself. (See my blog: Lean Accounting and Traditional Accounting Compared Part 4 – Lean Culture Integration)
- More troubling is that (almost) no one understands the traditional costing because it is too complicated. Beyond the standard cost accounting lies – are the waste and complexity associated with traditional accounting. Traditional Accounting not only wastes a lot of time, it also makes the information produced completely useless for making decisions, because no one who has to act on it understand it clearly. Sure, cost accountants do, but they are not the people in the operation who will be responsible for carrying out decisions that are made. I recently wrote a blog about this specific problem: Is Product Costing Helpful to Lean Companies?
I believe that making almost any decision within a Lean business standard cost analysis will lead to mistakes. Whether it involves outsourcing, insourcing, adding or eliminating human or machine resources, implementing engineering changes, developing new markets, reducing or expanding product lines – you have to know not only what your spending will be (not to be confused with standard cost), but also any risks involved, any opportunities that might arise as a result, and what will be the effects on your customer (in terms of on-time delivery, quality, etc.)
Standard Costing just doesn’t work for making decisions. The traditional decisions making methods do not take into account the impact on value stream performance or the capacity used. Every company I work with used to routinely make bad decisions because the standard cost lies to them, every day.
What’s needed is a methodology that lays all your cards on the table, giving you the best possible information. And that’s the Lean Box Score.
Using the Box Score
There are three big things about using the Box Score for decision-making.
- The decisions are made taking account of the impact on the whole value stream. Instead of looking at the individual product or production cell, you can see the real affect of these decisions on the business.
- The Box Score shows a thorough view of the value stream. It takes account of the financial impact, but also the changes in capacity and the operational outcomes. All of these issues must be addressed for sound decisions to be made.
- The Box Score shows simple and clear-cut information. Anybody using this information will spend their time addressing the important business decision – not asking questions like “what does this mean?” or “where did these numbers come from?”
Examples of When & How to Use Box Scores for Decision Making
(these are just a few)
Finally, here’s a table that lays out more about decision making; the rightmost column lists the Lean Principles at stake for each item.
Our trip around the Lean Accounting v traditional mind map is almost done. Next time: Data Gathering.