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Costs (Part 2)

  • Be careful about how accountants track costs in a Lean operation. The two main issues are related to the consumption of inventory as levels are reduced and with the changes in standard costing for machines as batch sizes are altered.
  • Be especially wary about how cost savings are reported due to kaizen activity. Overstate the impact and you lose credibility. Understate the impact and it can be hard to convince the naysayers of Lean’s value.
  • Become especially familiar with opportunity costs and sunk costs. Your projects will always have alternatives that you can be doing, so present an opportunity costs. And you will often have to abandon pet projects when alternatives are discovered. The money already spent has no bearing on the decision.

There is a fine line between being conscious of costs associated with Lean activity and having faith that Lean works. For example, there is a cost associated with pulling people from their jobs to participate in training or to work on a project. It can be a challenge to account for the materials used in a shared work area that supports kaizen. It can also be daunting to discuss the effect Lean activity may have on cost structures when employees are regularly moved between operations.

Remember, accounting for costs is subservient to creating value. Don’t let the way you track things affect the hard decisions that go with a Lean journey. That’s not to say you should do battle with the accounting staff. It does mean, though, that you need to talk it out with them before you make major changes. They need to be ready for some significant fluctuations in the numbers.

  • The term ‘costs’ can create confusion. There are many types of costs and the way they are tracked can vary widely.
  • Tracking costs serves a variety of purposes. You have to pay the bills, show investors what is happening with their money, and make sure Uncle Sam gets his cut. They all track differently.
  • There is a fascination with tracking costs in a kaizen. Be careful how you do it to prevent undermining the improvement process.

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