Many of us have gazed wistfully into the distance thinking how marvelous it would be to be able to have cost of producing a product at any time of day.  Activity based costing seduced the accounting profession very much like the sirens in Greek mythology.

Right from the start the writing was on the wall. The consultants were more expensive, they talked in a language we hardly understood and disappeared in the bowels of the organisation for months on end.  We knew they were there as the Porsche was parked in the visitors’ car park.

In a lean company, the cost of a product can be derived from dividing the production for the value stream costs.  Yes it is a primitive number but certainly good enough.  A lean company’s closing stock could be as little as a few days of production with some longer term holding in strategic stocks for overseas sourced materials. So why have a ABC system?

Given that we are not expecting much movement in closing stock, we can now just charge the current period with all overheads incurred.  We can take the view that the overhead is a sustaining cost and fully absorbed in the current period.

This has many advantages:

  • no need for a complex evaluation system as the G/L will trap the costs
  • the accounts are now showing real numbers
  • we are adopting the KISS principle

For a quoted company you could calculate the adjustment to GAAP, but I would not book it.  Leave as an adjustment in the “overs and unders” schedule maintained at year-end.  As night follows day it will be offset by some other adjustment.

This is a radical change in thinking for many readers so I suggest the following reading:

  • Re-inventing the CFO by Jeremy Hope
  • Maskell, Brian and Kennedy, Francis “Why do we need Lean accounting and how does it work” Wiley Inter Science 2007