APQC recently interviewed Nick Katko, Senior Consultant with BMA Inc., about the challenges a CFO faces when a company decides to use a Lean management system.
Nick Katko has been with BMA since 2002. He has been a CFO for various manufacturing companies that implemented Lean practices and has also worked in public accounting. As a CFO, Nick has led the companies in the implementation of Lean accounting practices such as performance measurements, value stream costing, Lean decision making, and the elimination traditional standard cost systems.
Question: You say that “the CFO is the architect of the company’s management accounting system.” What events could possibly lead to the need for an architectural overhaul of a company’s management accounting system?
A management accounting system needs to meet the needs of management in three areas:
- Measure business operations
- Provide operational control
- Provide management with proper information to make decisions
The adoption of Lean practices by any business is the “event” that creates the need to change a management accounting system. Becoming a Lean company means operations are controlled differently and what must be measured also changes. Finally, the economics of Lean (how Lean makes money for companies) must be incorporated into decision making. So a Lean company needs a Lean management accounting system.
Question: You say that when a CFO has a Lean management system, he/she measures spending not cost. Can you elaborate briefly what the benefit is of this?
Costs are historical, which means you can analyze the cost to find our what happened, but you can’t change anything about the cost. Lean is about using information to solve problems. To solve a problem, one must know the root cause.
In a Lean company, we want to reduce costs, but we do this by focusing on the root causes of spending, which involves business decisions or operating behavior.
Question: When a company goes “Lean,” why must the CFO tear down standard costing?
Management accounting systems based on standard costing are based on traditional manufacturing practices, and such systems work quite well in such companies. Lean companies operate almost 100 percent opposite of traditional manufacturing companies, so a management accounting system based on standard costing must be torn down in lean companies (over time) because it will provide the wrong information to management.
Question: What are some common misperceptions about Lean accounting?
One misconception is that Lean accounting doesn’t comply with Generally Accepted Accounting Principles. This is simply not true. Another misconception is Lean accounting is somehow a second set of books. Again, this is not true. All Lean accounting information comes from a company’s general ledger.