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Chapter 17 - The Management and Control of Quality
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Reading 17-6: Jan P. Brosnahan, “Unleash the Power of Lean Accounting,” Journal of
Accountancy (July 2008), pp. 60-66. (Available at:
http://www.journalofaccountancy.com/Issues/2008/Jul/UnleashthePowerofLeanAccounting.htm)
The author of this article is divisional controller at Watlow Electric Manufacturing Company
(www.watlow.com), which recently introduced a lean accounting system to support its move to “lean.”
This article provides a perspective regarding the motivation behind these moves and the associated
benefits of the changes implemented at Watlow Electric.
Discussion Questions:
1. How does the author of this article define the term “lean accounting” and what does she indicate
as some of the primary methods of “lean accounting”?
One broad interpretation of “lean accounting” would be the set of internal accounting practices and
systems designed to support an organization’s move to “lean manufacturing.” As stated in the article,
“lean accounting concepts are designed to better reflect the financial performance of a company that has
implemented lean manufacturing processes.”
The primary elements or methods of “lean accounting” are as follows:
a) organizing costs by value stream, not by department or by product
2. In what sense does the author see a deficiency in terms of using traditional accounting systems
when an organization adopts a lean manufacturing strategy?
Proponents of lean accounting maintain that traditional management accounting systems at a minimum
do not capture the process improvements associated with a move to lean manufacturing or at worst
contradict improvements made by this move. (Some of these effects, though real, are short-term in
revise existing internal accounting systems to support the changed initiatives.
17-30
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
3. What is meant by the term “value stream management” (VSM) and how, specifically, was this
instituted at Watlow Electric?
As noted above, one of the tenets of lean accounting is the construction—for reporting and decision-
making purposes—of value streams. A value stream can be defined as all the activities required to bring
a product or service from conception through to the customer, including related information processing,
logistics, and the collection of money. This concept is key because under lean accounting, like-kind
delivery, and cost (SQDC). (See Exhibits 1 and 2 of the article.)
The basic steps used by Watlow to implement VSM are given in the bullet points of the article. See
Exhibit 3 for a timeline regarding the implementation of VSM at Watlow Electric.
4. What implementation challenges did Watlow experience as it moved from a traditional
accounting and control system to VSM?
As with any fundamental change in business or accounting practice, behavioral considerations are key
to successful implementations. This was the case at Watlow Electric. The author identifies two specific
behavioral issues that the company had to address as part of its implementation effort:
• Employee anxiety associated with role ambiguity—a problem that was particularly acute for
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Reading 17-7: Brian H. Maskell and Frances A. Kennedy, “Why Do We Need Lean Accounting
and How Does It Work?” The Journal of Corporate Accounting and Finance (March/April
2007), pp. 59-73. (Published online in Wiley InterScience, www.interscience.wiley.com, DOI
10.1002/jcaf.20293.)
The authors of this article offer a rationale for a change from traditional accounting and control systems to
“lean accounting.” As well, they provide an overview of the workings of a lean accounting system.
Discussion Questions:
1. Some managers might contend that “lean manufacturing” is just another fad. How do the
authors respond to this assertion?
First, the authors reference some survey evidence regarding the sheer number of manufacturing
companies that have embraced, to some extent, lean manufacturing. Second, they indicate that “lean
thinking” is applicable to service entities as well as to manufacturing entities. Third, the authors suggest
that “lean” is not simply a new approach to business improvement. Rather, they suggest, it is a way of
2. Provide a short summary of the deficiencies of traditional accounting and control systems, as
suggested by the authors of this article.
The authors make a bold assertion, which provides a good attention-director for students: traditional
accounting systems are not benign—rather, they are “actively harmful to the lean transformation.” The
following deficiencies are offered by the authors:
a) Traditional systems use the wrong performance indicators (which, in turn, have dysfunctional
consequences)
sheets, work orders, detailed inventory-tracking systems, etc.)
f) Traditional systems focus on cost, not on how customer value is created and can be improved
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3. As proposed by the authors, what are the primary objectives of a “lean accounting system”?
The authors propose the following primary objectives of a lean accounting system:
a) Provide accurate, timely, and understandable information to motivate lean transformation throughout
and actionable, and that empowers continuous improvement at every level of the organization.
4. What lean accounting methods and tools are available to support the primary objectives referred
to in (3) above? (Hint: Please refer to Exhibit 5 in the article.)
As indicated in the text of the article, and specifically in Exhibit 5, the tools that can be used to support
the objectives of a lean accounting system are not really new. These tools can be classified according to
three key aspects of a lean organization: visual management, value stream management, and continuous
improvement.
Visual management includes the use of box scores, development of appropriate performance metrics
improvements, make product-line decisions, and plan future changes.
Continuous improvement, in a lean accounting system, can rely on tools such as target costing and
sales, operations, and financial planning (SOFP).
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Reading 17-8: Shaun Aghili, “A Six Sigma Approach to Internal Audits,” Strategic Finance
(February 2009), pp. 38-43.
The author of this article provides an overview of the Six Sigma process, as well as how that process
might be applied to the development or strengthening of internal control processes.
Discussion Questions:
1. According to the author, what is the motivation for devoting resources to the development of an
effective internal control system?
The basic business reasons for developing an effective internal control system are:
a) Improve profitability by avoiding non-value-added expenses (from the standpoint of your targeted
customers) and by improving the effectiveness and efficiency of various organizational controls.
b) Apart from the potential positive impact on the bottom line, companies need an effective internal
The above discussion is important to establish the business issue in the minds of accounting students.
Once this has been accomplished, discussion can then turn to how accounting systems can help
accomplish the stated business goals or solve the indicated business problem(s).
2. What are the elements of the performance-improvement model typically used to implement Six
Sigma projects?
The elements or phases associated with a typical Six Sigma project are reflected in the acronym
DMAIC: Define, Measure, Analyze, Improve, and Control—see Table 1 in the article). These phases
3. What role is played by “cause-and-effect” diagrams in a typical Six Sigma project? What is the
“Pareto principle” and how is this applied to a Six Sigma implementation?
a) “Cause-and-effect” diagrams are used in conjunction with phase 3 (analysis stage) of the internal
audit project. These diagrams (also referred to as Ishikawa diagrams) are useful tools for determining
b) The Pareto Principle (or, Pareto diagrams) help managers focus attention on the most important
quality-related problems, or those for which there is the biggest payoff (in terms of process
improvement). The basic model is that 20% of the causes account for roughly 80% of the problems.
Chapter 17 - The Management and Control of Quality
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© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Thus, management puts its attention where the payoff is likely to be greatest. As with “cause-and-
effect” diagrams, Pareto diagrams are used in stage three of the DMAIC process.
4. Provide a brief summary of Six Sigma certifications.
This question is designed to give accounting students greater knowledge of the certification process
associated with Six Sigma. Please see the section of the article entitled “Six Sigma Training:
Requirements and Learning Objectives.” As indicated therein:
a) White belt = Six Sigma awareness
smaller Six Sigma projects and, ultimately, a capstone project. The author of the article maintains that
certification as a Black belt Six Sigma specialist is a great complement to the CMA professional
certification.
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Reading 17-9: John Gillett, Ross Fink, and Nick Bevington, “How Caterpillar Uses 6 Sigma to
Execute Strategy,” Strategic Finance (April 2010), pp. 25-28.
In 2001, Caterpillar launched its 6 Sigma program to drive change to achieve the company’s long-term
strategic goals (Caterpillar uses 6 Sigma to identify its Six Sigma initiatives). This 6 Sigma process was,
and continues to be, extremely successful. Some of the results include first-year benefits that exceeded
implementation cost and achievement of the revenue goal two years earlier than planned. In this article
the authors briefly discuss Six Sigma in general, describe Caterpillar, and show the entrenchment of 6
Sigma within the company’s strategic planning process.
Discussion Questions
1. According to the authors, what is “Six Sigma”?
Six Sigma is basically a tool or technique that can be used to support a total quality management
(TQM) philosophy. The core concept of Six Sigma is establishing world-class expectations regarding
quality. “Sigma” is the Greek letter representing “standard deviation.” Sigma can be used to describe
very few defects per million items produced.
2. Explain the DMAIC process and how this relates to “Six Sigma.”
Six Sigma focuses on the control of processes. Under strict control conditions, the process should
produce very few defective (i.e., poor-quality) outputs. This raises the issue as to what tools are
available to help achieve process control. DMAIC (Define, Measure, Analyze, Improve, Control) is
3. Provide an overview of the application of Six Sigma at Caterpillar.
Six Sigma was introduced at Caterpillar (a Fortune 100 company) in 2001. (As indicated in the article,
Caterpillar is the world’s largest manufacturer of construction and mining equipment, diesel and
Chapter 17 - The Management and Control of Quality
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The implementation of Six Sigma at Caterpillar was time-consuming: the authors report that its initial
rollout consumed at least 300,000 hours. The authors report that “each employee knows and
understands that major initiatives and changes will take place using the six sigma strategy.” In other
words, the adoption by Caterpillar of Six Sigma required a cultural change in the organization. Six
While difficult to “prove,” the authors report that because of the pervasive implementation of Six
Sigma the company was able to meet an aggressive sales goal ($30 billion) two years early.
The article is applicable to Chapter 17 because it deals with a focus on process improvements as part
of an organization’s comprehensive model for managing and controlling quality.
Chapter 17 - The Management and Control of Quality
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Reading 17-10: Keith T. Jones and Clement C. Chen, “The Pervasive Success of 6 Sigma at
Caterpillar: Accounting and Finance Efforts Are a Good Example,” by Strategic Finance (April
2010), pp. 29-33.
The increasingly competitive marketplace has for some time now made it necessary for organizations of
all types and sizes to reexamine their business processes—from engineering and production to marketing
and financial functions—in order to determine how they can improve them. As if it weren’t enough to
tackle everything once, continuous improvement has become the standard in today’s global, constantly
changing environment.
Discussion Questions
1. According to the article, what is the underlying logic or justification for the use of a tool such as
Six Sigma?
First, the underlying driving factor for attention to process and operational improvements is
competitive, world-wide pressures. Such pressures may call, in fact, for continuous-improvement
activities, total quality management (TQM) philosophy, etc.
Second, one might illustrate the underlying logic of (or rationale for) the application of tools such as
Six Sigma as follows:
1. Organizational outcomes are a function of processes (operating processes, customer-management
4. Tools such as Six Sigma have as their objective a reduction in process variation and therefore
represent a key component of a competitive strategy that focuses on quality-improvements
2. What characteristics of the roll-out of Six Sigma at Caterpillar stand out in your mind?
• there was strong and consistent support of the effort by top management
• the Six Sigma initiative was pervasive, in the sense that it applied to virtually every process of the
• the overall philosophy regarding the application of Six Sigma at Caterpillar can be summed up in
the “recipe for success” (i.e., the three Cs) contained in Figure 1.
Chapter 17 - The Management and Control of Quality
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3. Provide a brief synopsis of the application of Six Sigma to the accounting/finance function at
Caterpillar.
Problem: the accounting/finance function at Caterpillar is divided into three primary areas of
responsibility: legal entity reporting (presumably, this includes external reporting and tax accounting),
regulatory (i.e., SEC) reporting, and internal (managerial) reporting. From a strategic perspective,
there was a perception that far too much time and expense was being spent on the first two functions
as compared to time spent on function #3. In the words of the authors, “far too much time was being
spent on generating reports and not enough time on generating insights from the
numbers…Importantly, business decisions could be less than optimal as a result.”
Solution: Caterpillar applied the Six Sigma methodology to change the basic focus of its
accounting/finance function, from “adding up” to “adding value.”
Benefits: The authors of the article report that there were two primary benefits associated with the
to manage and support the growth objectives of the company.
4. According to the article, what are some of the factors contributing to the long-term success of the
application of Six Sigma at Caterpillar? That is, “how do we change from building the house to
living in it?”
• Continuing and visible support from top management
• The “best people” of the organization are assigned to the most important process-
improvement projects
Chapter 17 - The Management and Control of Quality
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Reading 17-11: Manjunath H. S. Rao and Andrew Bargerstock, “Exploring the Role of Standard
Costing in Lean Manufacturing Enterprises: A Structuration Theory Approach,” by,
Management Accounting Quarterly (Fall 2011), pp. 47-60.
Do mature lean manufacturers continue to use standard costing and variance analysis? The authors
present a research protocol to determine if this is the case and how it compares to lean accounting theory.
Discussion Questions
1. According to the authors, what are the characteristics of production processes today that would
argue for a paradigmatic shift from traditional cost-information systems (such as those that rely on
the use of standard costing and associated variance analysis) to “accounting-for-lean” systems?
The motivation for change (and simplification) of cost accounting systems, from cost-based to value-
based systems, is directly related to changes in manufacturing/production processes. Traditional
processes consisted of producing large volumes of more or less standardized products. It was in this
environment that standard costing—for recording and controlling manufacturing cost inputs—was
developed. Standard cost variances, which result from a comparison of actual costs to standard costs,
were generated to effect financial control of the manufacturing process. Given the context, standard
costs and associated variances served management well.
Manufacturing processes have recently changed. These changes call into question the value of standard
cost systems for control purposes. Today, it is more likely to observe customized or made-to-order
output (given available computer and manufacturing technologies)—some characterize this as “batch
that have already occurred.” This, then, serves as an effective way to distinguish standard cost systems
from “accounting for lean” systems.
Finally, we reproduce here the following comments of the authors regarding the alleged benefits of
“accounting for lean” systems, from a control standpoint:
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Measurements produced by these systems are superior to standard costing and variance analysis in
several ways because they:
• Are developed by each work-cell team to support value-stream metrics
• Provide more detailed information for controlling workflow processes
The instructor can make the point to students that change in management accounting systems is driven
by change in underlying business processes, including changes in production processes described
above.
2. This article provides a framework that might guide empirical research into the determinants of
cost-system preference. Specifically, they are interested in addressing the question: “Why do (some)
lean enterprises continue to use standard costing?” Provide an overview of the testable propositions
offered by the authors in terms of explaining this phenomenon.
The set of testing hypotheses (propositions) developed by the authors is presented in Table 1
(Elements of Structural Dimensions and Propositions). The specific propositions are reproduced
below:
1. In lean manufacturing organizations with a high level of inventory, as indicated by the number of
days’ inventory on hand, the probability of retention of standard costing will be high.
2. In lean manufacturing plants with “monument machines,” the probability of retaining standard
costing for inventory valuation will be high. (“Monument machines” are defined by the authors as
5. In lean manufacturing plants where the management accountants believe that the use of standard
costing techniques is a requirement under GAAP, the probability of retaining standard costing for
reporting purposes will be high.
6. In lean manufacturing plants where the management accountants prepare specialized reports to
capture the financial impact of lean, the probability of retaining standard costing for reporting
purposes will be low.
7. In lean manufacturing plants were the organizational responsibility centers are classified as cost
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3. Of what value or significance is the information presented in the Appendix to this article?
As indicated in the article, “Appendix 1 shows new accounts and journal entries that a lean
manufacturing plant may use to reflect the value-stream approach of lean accounting as opposed to the
cost-based approach of standard costing.”
The journal entries listed on the left-hand side of the Appendix parallel those presented in the textbook
in Chapters 14 and 15. We see that a standard cost system charges WIP inventory, Finished Goods
Inventory, and Cost of Goods Sold at standard manufacturing cost. Since actual costs are also recorded
(see for example the credit portion of entry #1), this implies the need to record standard cost variances
than entering an inventory account the cost is charged to a more aggregated and descriptive account
called “Capacity Control.” Other differences are illustrated by the entries on the right-hand side of the
Appendix. The primary point is that this accounting is simpler, more streamlined, and value-based.
