And now we change tack slightly moving on to Lean Accounting. And I want to bring us back to the definition of lean that I introduced earlier. If you remember taiichi Ohno gave a definition of lean and his book The Toyota production system. And it says that all we are doing is looking at the timeline from the moment the customer gives us an order to the point when we collect the cash and we are reducing the timeline by reducing the non value adding wastes. Looking at this definition, we see that lean is all about flow through a business process and removing the impediments or constraints to that flow. In lean, these impediments are called waste.
And that's very similar to what we had in the Theory of Constraints. We have the five principles of lean earlier to and just to remind you of what they are, they are firstly to specify value and the eyes of the customer. Secondly, to identify the value stream and eliminate waste. Third, to make value flow to the pull of the customer. Fourth, to involve and empower employees and improvement and fifth to continuously improve in the pursuit of perfection. And those five principles come from the book the machine that changed the world.
And Lean Accounting shares its core philosophy with throughput accounting, which is to say that if we increase the throughput through our business process, we increase profitability, because we're able to do more with the same resources and that means more profitable work. To summarize the philosophy of lean then, lean is a time based strategy which focuses on flexibility and speed of response to the customer requirements. And we streamline the production or service delivery process to meet that customer requirement. And the aim is that if we improve the flow through the process, we improve profitability but customers value is king. And the question in lean is, why would you perform any activity that the customer is not willing to pay for. Another aspect of lean is that improvement never stops.
The aim is to maximize competitive advantage through operational excellence, which means continuously aiming to improve the rate of flow of work through the process of value stream as it's called lean. And another angle from the lean philosophy is that the people in the process are the ones who are best placed to improve it. So to sum up, the lean philosophy is all about flow. And Lean Accounting is also all about flow. Lean Accounting holds that profitability is related to the rate of flow through a process and the lean environment cost is related to the rate of flow through the value stream. And if we measure and manage the flow, we We manage the cost by improving the flow, we reduce the operating cost and we also increase capacity.
And by increasing the capacity of the value stream, we increase its profitability by being able to do more work with the given resources. So, like the Theory of Constraints, lean is all about the flow of work through a business process and removing the impediments to that flow, which are called waste in the lean terminology. And I want to say at this stage that lean is a people process. You may have heard of different lean tools, the five Why's the Ishikawa diagram, value stream mapping, hoshin, kanri, and Poka Yoke. I can't remember there's a whole long list of them. But actually lean is about people working in their process to improve the flow through the process.
Lean argues that the people in the process a best place to understand its problems. It's constraints, and that those processes are best improved by the people who work in the process, working together using problem solving tools. So creating a culture of improvement is about people feeling free to raise issues and concerns, and to then work together to resolve them. And lean argues that involving people in improvement is more important than any lean tools that you may have heard of. improvement becomes the responsibility of the team who work in the process. And managers facilitate that team by providing support, expertise and training as necessary.
And of course, all of this requires trust. The people who work in the process have to trust that the organization wants to do the best thing for the customer and wants to improve the process but won't eliminate their jobs when improvement has taken place. Who would willingly improve themselves out of a job? Let's now discuss it cost accounting in a lean environment. As we saw earlier, traditional standard costing was developed for mass production. And its philosophy is that profitability is maximized when labor and machine utilization are maximized.
And this gives us variances which every accounting student remembers with some dread from their exam. The focus of standard costing is on the lowest cost per item through economies of scale. But we saw in the shirt example, that focusing on the lowest cost per item doesn't maximize the profitability of a process. And in fact, this concept of economies of scale does not apply in a high variability, multi product environment, which is in fact what most businesses are nowadays. in such an environment. profitability is maximized when the rate of flow of work through the process is maximized.
In fact, Lean Accounting argues that there is no such thing as standard cost, and I fully agree with that statement. Many factors affect the way to which work flows through a business process. These include the product mix, scrap and rework, other quality issues, downtime, maintenance, staff sickness, and so on. And this means that there can be no one standard cost, as the cost of operating the process varies from minute to minute from hour to hour from day to day, depending on all these various factors affecting the flow of work. So, the standard cost is therefore, a highly aggregated average, calculated over a long period of time. It's totally meaningless for performance management in the process itself.
That doesn't mean we don't seek to manage cost. We just seek to manage cost in a different way. There is still a process cost. And if we can stabilize the rate of flow of work through a process, we would stabilize itself. Costs quite clearly. And if we can improve the rate of flow, that means we create capacity to do more profitable work in the given time period with the resources available.
Therefore, measuring and managing the rate of flow through business process is the key to improving its profitability, and performance management and lean means measuring and managing the rate of flow and aiming to continuously improve it. That is what Lean Accounting is all about. So, what is Lean Accounting? Well, as I've just suggested, the new accounting was developed to provide management accounting support that complements the lean philosophy. It focuses on customer value, aims to measure and manage flow with the aim of improving it. It supports continuous improvement by providing timely accounting information that is understandable and usable by improvement teams aims To apply Lean principles to accounting procedures, as we'll see, and it supports decision making and planning with a lean perspective who developed Lean Accounting?
Well, Lean Accounting has its roots in contribution costing, which has a long history, and was developed by accountants working in businesses implemented the lean philosophy and where traditional approaches to costing were hindering improvement. In 1963 Gordon Schilling law published an article called the concept of attributable cost in the Journal of accounting research, which lays out many of the issues which are now contained within Lean Accounting, in terms of Lean Accounting itself in 2003 gene cutting them and RFU may publish the book, real numbers management accounting in a lean organization. And both of the authors have worked in lean enterprises. Also in 2003, Brian maskull and Bruce finally published their book practical Lean Accounting, a proven system for measuring and managing the lean enterprise. And this is the first proper textbook on Lean Accounting laid out like an accounting text. And if you're interested, the annual Lean Accounting summit continues to present the latest thinking and Lean Accounting and usually takes place in the United States.
They'll believe they have held one in Europe. And the question for me to answer at this stage is how does Lean Accounting differ from throughput accounting? And the short answer is not by a huge amount. throughput accounting focuses on finding and removing the constraint or the bottleneck in the process. And then moving on to the next constraint. throughput accounting and the Theory of Constraints are very much about constraints in the process.
Lean Accounting, by contrast, takes a more holistic view and considers the flow of work through the whole process, or value stream as it's called in lean startup. Takes a kind of bigger picture. throughput accounting uses only the three performance measures that we saw and the four KPIs derived from them. Lean Accounting, by contrast, has a much broader palette of measures and KPIs, as we'll come to shortly, but it does rather ignore the concept of throughput. Lean Accounting, I believe provides more of a structure for performance measurement and improvement, and it emphasizes the role of the people in the process. as agents of change.
I've worked on Lean Accounting projects over the last 12 years or more, so you might expect me to be slightly biased, but I do believe that Lean Accounting provides a bigger picture view of flow accounting and process improvement and how to analyze and understand the process and how to make decisions and plan ahead for process improvement. Lean Accounting has seven aims, and we're going to cover each of these in the course. The first aim is to complete performance measures that motivate improvement. Second, we have to focus on improving flow and profitability by eliminating constraints. Third, we have support relevant and timely decision making. Fourthly, we have eliminate unnecessary accounting transactions.
Fifth, we have to highlight the impact of process improvement on eliminating waste, improving capacity and improving flow. Sixth, we have drive the growth of the business by increasing customer value. And seventh we have create strategic growth by planning by value stream with the focus on improvement. And we're going to look at how Lean Accounting delivers each of these aims in the rest of this course. Before we do that, I should reference some books on Lean Accounting if you want to take this study further. When I first started working on Lean Accounting projects about 12 years ago, there were very few books available.
There's a lot more now. So there's a lot more choice. And if you look on Amazon, you'll find more books than I've got up here. However, I believe these are some of the key books. And these are perhaps the ones that you want to consider starting with. So we have practical Lean Accounting by Brian maskull and Bruce Begley first published in 2003, with a second edition in 2012.
And that is effectively the accounting textbook of Lean Accounting. We have the lean CFO by Nick catco, who is one of Brian maskull colleagues, and that is taking the concepts in practical Lean Accounting forward in terms of how the CFO of an organization should implement and manage them. And just to give you full disclosure, I have worked with Brian maskull and Nick catco on numerous Lean Accounting projects, over 10 to 12 years. Next, we have accounting for the lean enterprise by Gloria McVeigh, published in 2013. I've met Gloria she's very nice lady, though haven't worked on it. projects with.
Next we have who's counting a Lean Accounting business novel by Jerry Solomon published in 2003. And this is an easy reading business novelization approach to explaining Lean Accounting, nice and straightforward, easy to read, enjoyable. And then we also have real numbers management accounting in the lean organization, by Jean coming in, and refu May, also published in 2003. And alongside practical Lean Accounting, real numbers was one of the books that's established the Lean Accounting revolution.