Lean accounting modern management tools in Vietnamese business

285 International Conference on Finance, Accounting and Auditing (ICFAA 2018) November 23rd, 2018 Hanoi City, Vietnam Lean Accounting Modern Management Tools in Vietnamese Business Nguyen Thi Minh Phuonga aNational Economics University Submission day: 30/10/2018 Review day: 10/11/2018 Acceptance day: 15/11/2018 Abstract Keeping abreast with the industry revolution of 4.0 mentioned in every aspects of life, Accounting in general and Management Accounting in particular, are constantly evolving and integrating with modern industrial processes to help administrators for effective and reasonable means of management: Lean Accounting is a management model that focuses on utilizing the human or organization intelligence to minimize the prodigal cost. Lean management uses the system of tools and methods such as 5S, Kaizen, JIT, ... in order to reduce the costs in manufacturing. On the basis of Lean Manufacturing, Lean Management, the article does research on Lean Manufacturing, the system of tools and methods of Lean Accounting, from which some solutions are proposed to be applied in in Vietnamese enterprises. Keywords: Lean accounting, Lean management, Lean manufacturing 1. Introduction 1.1. Lean Accounting Concept Lean accounting is defined as an accounting model employed by enterprises applying streamlined production process. This model involves methods like organizing and maintaining value streams, changing the techniques of inventory valuation and adding some non-financial information into the company’s financial statements. Lean accounting is the accounting model applied to enterprises applying streamlined production process. This model includes methods such as organization and management of value streams, change of inventory valuation techniques and addition of some non-financial information into the company's financial statements. 286 Maskell's research provided the theoretical framework as an example for lean manufacturing companies who choose a lean accounting method in place of traditional accounting. The development of the 4-step accounting model has been one of the most valuable contributions: (1) maintain the current accounting system and control methods, but start cutting down costs that are clearly obvious and visible within the production process; (2) cut down on transactions as well as unnecessary expenses in the production review process as well as try to reduce the amount of unfinished products; (3) link waste minimization with the current accounting cycle as well as sales, production and distribution cycles to be performed in a more general manner; (4) progressively transitioning operations with new cost calculations in accordance with the steps set out above for complete production. This model suggests changes that need to be made in the accounting system along with lean changes being deployed at different points in the organization. In line with lean manufacturing, management requirements and providing information to value chain managers, traditional accounting is no longer appropriate, requiring lean accounting to be established. Horngren (2009) and Garison (2010) discussed and underlined the basics of lean accounting with such criteria as Inventory, Just in Time, Target Costing. The principles of lean accounting are very different from traditional accounting, with streamlining accounting’s view of the value for customers rather than for the benefit of shareholders. The difference between traditional accounting and lean accounting is streamlined by value chains rather than by functions. A value chain is a sequential order process from ordering to delivery. Designed by a value chain with diverse and extensible functions such as: manufacturing, engineering, maintenance, sales, after sales, accounting, human resources and delivery. 1.2. The purpose of Lean Accounting - To submit to performance meansurement and cost information to the value stream leaders to provide them that control effectively the flow of value and support continuous improvement - To provide infomation for cost reporting and meansurement of performance to senior employees - To provide related cost information this will be recorded in accounting and the income statement - Lean accounting aims to provide useful information for working actively to implement lean production manufacturing proess and maintain. 1.3. Stages of Lean Accounting Lean Accounting should be applied in parallel with consistently implementation of lean thinking and lean manufacturing techniques. For the transition to lean accounting firstly, need to know what path we are in the maturity stage of lean munufacturing and than a maturity path should be selected accordingly (Maskell & Baggaley, 2004) 287 2. Literature Review/ Theoretical Framework and Methods Lean accounting is defined on the basis of lean production. Lean production is derived from the system of Japanese car manufacture industry in the 1970s – 1980s. Its main purposes are eliminating waste, reducing the demand for inventory management and optimizing the quality of management decision with the least cost in the output. A research for the performance in the car assembly plants had led to the widespread application of fine motor activities in many different industries (Womack and Jones, 1996; Liker, 1998; Hendersen and Larco, 1990). Using the lean ideas in many industrial fields, Womack and Jones found out 5 general, outstanding lean principles. This implementation supports the aims of waste elimination in non-value-adding work, attempt to reduce cost to reach the perfection by continuous improvement. These principles are identified as follows: Customer Value: The main principle of lean manufacturing is defined by the final customer, value is evaluated in particular items, particular customer with particular price (Womack and Jones, 1996). As usual, product value is created by manufacturers, yet, with reference to this viewpoint, customers are the key to this value. All of the non-value work that doesn’t bring about the adding value for customer, despite the manufacturers’ view of its worth to customers, is regarded as waste and needs to be eliminated. Value stream: It is the set of all specific activities necessary for specific products, through 3 management tasks: from the design to the final consumption, including order, material handling, production, and transportation (Womack and Jones, 1996). Lean Management eliminates the waste in every activities mentioned above. Flow: Any wasteful operations will be eliminated, while the rest of them will be organized into a stream. Creating a continuous, fast and flexible flow of production in order to avoid or eliminate waste, thus, supply productivity and quality. This means to change from traditional organization towards a holistic organization. Pull: When value steps are organized into flows, material flows are controlled by two Push-pull methods. Traditional production methods tend to push products through the system with the expectation that consumers will buy the product. Lean methods use pull method, only create materials when necessary, meeting the short-term needs of customers, not redundant. Perfection: When a company selects lean production, it will be a continuous improvement process. Promoting the reduction of time, space, cost wasted, lean production is the philosophy of continuous improvement. There are many associated tools and techniques, such as: Value stream mapping, 5S, Visual management, cellular manufacturing, Just in Time, kanban (pull) systems, preventative maintenance and kaizen (continuous improvement) activities (Bicheno, 1998; Rother và Shoot, 1998). Adopting a lean manuafacturing promises significant improvements in productivity, quality and delivery, resulting ultimately in substantial cost savings. Furthermore, companies are now beginning to realise that traditional costing and 288 management accounting methods may conflict with the lean innitiatives they are implementing (Womack và Jones 1996). 3. Results and Discussion Based on foreign research, the article systematizes some of the tools used in lean accounting and factors affecting the use of lean accounting in the enterprise. From that, the article proposes some solutitons to the problems in using lean accounting in Vietnamese enterprises, as well as the base for further research related to the author's area of interest - lean accounting. 3.1. Instrument of Lean Accounting Yvonne Ward & Andrew Gaves (2012), research and examines the costing and accounting requrements for Lean New product Introduction, Lean Manufacturing and Extended Value Stream: Figure 1: Tools of Lean Accounting New product Introduction Manufacturing Extended Value Stream • Life-cycle costing • Target costing Product costing and overhead allocation • Activity-based costing (ABC) • Product costing in cellular environments • Time-based costing • Value stream costing Operational control • Non-financial performance measures • Value stream box scores • Throughput accounting • Backflushing Costing for continuous improvement • Kaizen costing • ABC and costing reduction • Costing of waste and waste indices • Cost of quality • Inventory reduction • Activity-based costing for internal supply chains • Supply chain target costing • Supply chain kaizen costing • Total cost of ownership Source: (Yvonne Ward & Andrew Gaves (2012), University of Bath, School of Management) Two valuable techniques that can be applied with the aim of enchancing value and reducing product costs throughout the life-cycle are target costing and life-cycle costing. Target costing is believed to be the most important development to support the commitment to low cost production (Sakurai and Scarborough, 1997). Target costing is a multi-disciplinary tool for reducing total costs and seen as being particularly applicable for multi-product, small-production-run firms (Monden and Hamada, 1991). It is applied at the 289 planning and design stages of new products with the involvement of R&D, Enginneering, Production, Marketing and Finance. Target costing = Market-driven Target Price less Desired profit Margin Life- cycle costing: This method is suitable because the cost of the product includes not only the cost of procurement inputs but also the sum of all costs incurred during the life cycle of the product. In this stage, it is an effective tool to capture the full costs associated with high-valued products, from research, development, production, operation, maintenance and support; removal and processing. Besides, it is able to forecast the costs incurred during the entire operation to ensure the reasonable adequacy and to provide information to meet customer demand and make decision for the investor for the business. According to Kaplan (1988), in this phase, management accounting has three goals: inventory determination for financial statements, product costs and operational control. With lean accounting, it is important to focus on three objectives: Product Costs, Operational Control, and Continuous Improvement. The accounting tools used are: operating expenses, component costs, cost over time and cost along the value chain. With the utilization of these cost management tools, it is possible to control, as well as allocate and determine the accrued costs of the product in a reasonable, accurate and complete manner. Ensuring effective information is to help interested parties as well as managers to make decisions and define business strategies for products and organizations. Extended Value Stream: In this phrase, Activity-Based costing, Kaizen, in terms of aimed expense or total cost determination is carried out in accordance with supply chain. Therefore, it is essential to define a reasonably lean supply chain, cut down on the extravagant expenses and set up cost management tools on the basis of each activities like cost determination in delivery. 3.2. Factors that affect the implemenation of lean accounting According to foreign research there are various barriers to implementation of lean accounting, Roya Darabi (2012) used questionnaire data to reseach. The results showed that cultural, technical, organizational and economic factory were barriers to implementation of accounting. Moreover, regarding the four groups of factors, technical factors had the highest degree of impeding and economic factors the lowest. Based on the results and findings of the study, the following suggestions are made: Cultural: Cultural factors impede the performance of streamlined accounting, because different perceptions, beliefs, and behaviors can have different impacts on lean accounting. Cultural alteration is necessary to successfully implement lean accounting, which requires unity, solidarity from the leader to staff in conformity with cultural change, such as teamwork, for fully agreement. Lean environments with production cells that require people to be multi-skilled require only few, broadly defined pay grades. 290 Technical: Technical factors impede the implementation of lean accounting, so recommended that: Multi-purpose machinery and personnel with diverse skills should be used in production lines. For making senior executives and financial executives or staff aware of lean concepts, it is recommended to provide lean training inside the company. Organizational: There is a great need to be aware of how traditional accounting is modified by lean accounting. It is essential to organize and carry out activities in the process of both material and information. The company should consider long-term strategies and long-term goals to ensure sustainable development. Economic factory: Adequate resources for lean training should be considered in conpanies. Taxation laws or regulation should be administered in a way to encourage lean manufacturing executives to use the lean accounting. Customers should be made aware of their rights. In order to properly understand the cost of the lean system, it is suggested that the managers cosider long-term goals of the companies and profit of the whole company during its lifetime and then decide about establishing lean. Understanding the factors that affect the performance of lean accounting will help executives to implement lean accounting in the business successfully and avoid the risks and limitations which are not worth within the performance. 4. Conclusions and Policy Implications The application of lean accounting in Vietnamese enterprises: First of all, to use lean accounting in Vietnamese enterprises, administrators need to master the principles and thinking of lean production and lean management. Based on the lessons from many countries in the world, which have applied lean production, lean management and lean accounting, Vietnamese enterprises need to understand that the application of lean accounting is not merely the administrative tools but a whole process. To apply successfully, enterprises must set up mind, knowledge and understanding from the manager to the staff directly in producing and delivery services on the process of streamlining. Enterprises need to determine the use of lean requires the application of the process, organizational structure, corporate culture... Lean accounting can be applied in many different fields of operations from production to services, indicators and methods built in accordance with the characteristics and practices of each enterprise. Depending on the different areas, the accounting lean is applied flexibly and appropriately. In the field of services, lean accounting should first aim to improve the process. Typically, the service delivery process is tailored to fit the resources and characteristics of the business, not to the customer. Therefore, it often takes customers a lot of time and does not bring much value to them. Lean accounting and its tools help businesses deliver customer-oriented services that are the basis for design, process development, and service delivery. In the field of production, it is necessary to build a lean production model based on the principles of: Creating value for customers, Manufacturing towards the needs of customers and Bring many desired values for Consumers; Cutting costs as well as non-value activities; Build up the value chain from research, product design, 291 manufacturing, ordering to customer service, maintenance... to ensure that costs or operations are not extravagant. Applying the pull method, customer orientation and customer demands are needed for design and manufacturing. Continual improvement is evolving towards continuous improvement throughout the implementation process. Accompanying the lean production process, lean administration is also set up, including lean accounting. With the appropriate use of modern accounting management tools such as: Account-Based Costing (ABC), Kaizen, Target Costs... at each phase to reduce wasted expense, create value for the customer and towards perfect improvement through value chain and pull method. In order to apply lean accounting successfully and efficiently, enterprises should make preparations that require synchronization from production to administration, from management, thinking, methods and tools, direct implementation staff and service delivery. It is necessary to train staffs to understand and instill a lean thinking. Management officials commit to accompany the lean process, investing in systems from technology and human resources fit with each enterprise for implementation of lean process. On the basis of inheriting, learning and drawing experience from the research as well as the reality of the enterprises that have succeeded or failed to apply lean accounting in Vietnam and in the world, administrators study the influencing factors as well as the barriers when applying lean accounting, combined with the characteristics of the real financial situation in the enterprise so as to build a suitable streamlined accounting with high efficiency. For example, with services such as banks and hospitals, when using lean accounting, it is important to improve the process by reducing the cost of wasting time, such as waiting times of clients, patients, repeated activities and prolix procedure. The goal of process improvement is to create uninterrupted flow, uninterrupted operations among employees so that the customers might not wait. To the manufacturing enterprises, this means reducing the extravagant waste, such as high levels of inventory goods, the cost of rotation, storage, cutting down on the wasted operations that do not create value, improving the efficiency, reducing production and delivery time. Businesses need to be aware of the issues to be dealt with promptly at every stage of the production process, from which appropriate and effective management tools are chosen. 5. References Nguyen Đang Minh (2017) Lean Manufacturing in Vietnam, way to success, Hanoi National University Publisher Brian Maskell & Bruce Baggaley (2006), Lean accounting: What's It All About?, Target® Magazine, 1st Issue, page 35-43. Brian Maskell, Bruce Baggaley, Larry Grasso (2011), Practical Lean Accounting A Proven System for Measuring and Managing the Lean Enterprise, CRC Press. 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