Introduction
A budgeting is the process of creating a plan on how to utilize the available capital. Budget enables an individual or organization to determine in advance whether there is enough liquid capital to do the intended things (Sullivan & Steven 2003). Therefore, a budget is used by any organization to forecast on revenues and expenditure and also to establish the cost of operations. This paper will providecritical analysis on how managerial accounting differs with cost accounting. The paper also gives a brief description of lean production philosophy and highlight key differences between lean production accounting and typical production accounting. Finally the paper will provide recommendations on how Dr. White would prepare for reduced budgets that will enable him to cope with the reduced budget next year and the foreseeable future.
Budgeting
Cost accounting and managerial accounting are used for similar reason since bothare used for analysis and internal accounting. However, the two systems of accounting have some differences. Cost accounting deals with calculation and measurement of resources utilized for different business activities and operations in the production process. It involves calculating and forecasting unit cost of a good or service produced by the company. On the other hand managerial accountingrecords, plans and analyses income and expenditure in the business(Needles, Powers &Crosson2008). Therefore it involves comparison, analysis and business logic mainly to process information regarding transactions.This information processed through managerial accounting is used to make managerial decisions.
Lean production is based upon eliminating any expenditure of resources that leads to wasteful production, that is, expenditure that do not add value to the good or services produced. Lean production focuses on increased efficiency and decreasing waste (Stenzel 2007). Lean production is based on the following principles: eliminating wasteful expenditures, minimizing inventory almost to negligible levels, maximizing flow of inventory so as to reduce storage cost, improving the quality of goods so as meet customer requirements and hence improve the demand of the goods. It also encourages partnership with suppliers and encourages a culture of constant improvement of goods and services produced.
Lean manufacturing accounting principles differ from the typical production accounting in several key ways. For example, lean production focuses on efficiency and proper resource utilization. On the other hand, typical cost accounting reports aredeveloped mainly for outsiders to provide themwith a correctview of the company. The purpose of typical accounting is to provide general outward appearance of the business but does not assist in management of the business. This is in contrast with lean accounting principles which are aimed at improving the performance of the company.
Companies have adopted lean accounting principles to improve the performance of their operations and activities. As the company switches from traditional mass production it has to change the method of accounting. This is because the existing inventories, deferred labor and overhead are placed on the liabilities side of the balance sheet and subsequently on the expenses side of the income statement. This leads to the decline of net income hence causes concern to the executive and investors. Proponents of lean accounting argue that inventory is not an asset since it has handling cost, takes up space and reduces cash flow.They also argue that, technology changes very fast and the stored inventory can be rendered obsolete within a short time. This means that inventory is not actually an asset hence not placed on the asset side of the balance sheet.
Lean accounting proponents argue that some columns in typical financial statement do not make any sense to nonfinancial people therefore there is no need of including them in the financial statement. Examples of such columns are: variance from standard cost, standard material usage and standard labor rates (Kroll 2004). This means that standard costing does not make sense in lean accounting as compared to typical accounting. In lean accounting, the cost is organized to what is referred to as value stream.
Conclusion
Dr. White should adopt lean production principles in order to cope with the reduced budget next year and the foreseeable future. Lean principles will enable her to cut on the cost of production by eliminating waste of capital and minimizing inventory (Stenzel 2007). This will reduce the cost of production. She should also focus on the customer demand by offering quality services when needed. This will enable her maintain customers during this period. She should also partner with suppliers so as to supplier material in good time whenever need arise hence cut on the cost associated with inventory.
References
Kroll, K. (2004). The Lowdown on Lean Accounting: Journal of Accountancy. Retrieved on 31st January, 2013 from http://www.journalofaccountancy.com/issues/2004/jul/thelowdownonleanaccounting.htm
Needles,B, Powers,S & Crosson,S.(2008). Principles of Accounting. South western: Cengage Learning
Stenzel,J.(2007).Lean Accounting: Best Practices for Sustainable Integration. New Jersey: John Wiley & Sons, Inc,
Sullivan, A & Steven, M. (2003). Economics: Principles in Action. New Jersey: Pearson Prentice Hall
