Lean Way Of Valuing Inventory

Lean Way Of Valuing Inventory

Cengiz, Emre

American manufacturers which are choosing are lean principles as their basic business model, increasingly looking to lean thinking to improve productivity, reduce costs, enhance flexibility, create better value for their customers, and raise profits, cash flow, and stock price. The basic principles of lean thinking are based some solid factors namely profits are earned by selling products; value streams deliver customer satisfaction; nonfinancial operational data helps line workers manage business processes; real-time data is needed to enable process improvement; idle time is okay if there are no customer orders to fill at the moment; the goal of world-class organizations is to improve actual performance at a faster rate than competitors; front-line employees are an asset that should be cross-trained and highly skilled. Moreover, the cardinal rule of lean management is eliminating all unnecessary steps that create waste. In this context, lean accounting seeks to reduce steps in transaction processing, eliminate standard costs in favor of actual costs, and discontinue cost allocations. The traditional mass production companies which are typically advocators of standard costing see inventory as the largest current asset on traditional manufacturer s balance sheet and naturally, a traditional manufacturer use their inventory asset for collateral for bank lines of credit. Thus, lot of cash is tied up in the inventory. The traditional manufacturer inventory valuation is not based on an actual cost system. For instance, a company with inventory turns of 3.00 has four months of inventory on hand, which means it must use the actual production cost system for the last four months to value inventory. This absolutely obviates to maintain an actual cost system. On the other hand, lean companies aim to eliminate work in process and finished goods inventory with high inventory turns. A shrinking inventory value on a balance sheet based on real time cost information which in turn becomes a smaller percentage of total current assets is a typically way of doing for lean companies. This study illustrates the actual cost calculations for inventory valuation. The study will explain “the number of days method and unit quantity method” and highlight their differences between the traditional inventory valuation methods. Keywords: Lean Accounting, Inventory Valuation, Number of Days Method, Unit Quantity Method

Conference or Workshop Item
PeerReviewed

2012-05-31

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