6. Improved Costing and Pricing Models - Appropriate LEAN environments advocate for the elimination of standard costing. LEAN focuses on value based pricing. More Specifically, value based pricing allows for the price to be determined by the value created for the customer. In most manufacturing and even non-manufacturing environments, product costs are determined through complicated costing methods that tend to distort the true cost of product or services. These cost are typically marked up for a profit margin for sale. Here is a question for you - What if the customer does not see the value in the product that is perceived by you? Do you think they will still buy the product at your price?
Value based pricing gets away from the standard costing model of price determination. In value based pricing, price and cost are not related. Price is determined by the value created for the customer. In order to do this, you will need to gain a deep understanding of what creates value for your customers. Value based pricing will differentiate customers, products and markets based on value and match pricing policies to customer value.
7. Target Costing - Instead of standard costing in which the cost of producing the product is determined for pricing, target costing turns that equation around. For most companies the price of a product is equal to the cost to produce it plus a margin on top of that. Target costing says lets determine the price to sell the product through our value based costing discussed above, less the profit needed on each product to determine what the cost to produce the product should be. This methodology creates a much deeper understanding of value and costs. It will allow for product design to meet the value needs of the customer as well as meet business profitablility goals. This will ultimately drive spending to match target costs.
8. Eliminate The Annual Budgeting Process - In many companies the budgeting process starts months in advance and is very complicated and time consuming. By the time the budget is adopted and rolled out, business conditions have changed and the budget is out of date. Making managers adhere to these budget goals makes no sense. LEAN companies create financial forecasts on a monthly basis that come from a Sales, Operations and Financial Planning process. In this process, each of these three areas work together monthly to develop sales forecast and operational needs. From this information decisions are made on operational needs and financial plans and forecasts are developed. This information is constantly changing and therefore capturing current economic conditions.
9. Replace The OLD Accounting System - The purpose of LEAN accounting is to create an accounting, control, measurement, and decision- making system that supports and enhances the company's LEAN strategy. LEAN accounting is not an additional system. LEAN accounting replaces the traditional accounting methods. LEAN accounting is itself LEAN.
To learn more about this post or other LEAN concepts, please contact the LEAN Accountants of McKonly and Asbury, LLP.