Please disable your Ad Blocker to better interact with this website.

Image Image Image Image Image Image Image Image Image Image

Affluent Christian Investor | September 21, 2023

Scroll to top

Top

No Comments

Abstraction vs. Reality In Business

coins PUBLIC DOMAIN

Traditional accounting verses lean accounting. Keynesian economics verses Austrian economics. Abstraction verses reality. These have all been discoveries of mine during my career as a manufacturing engineer and also in my research. Early in my engineering career, while learning and implementing the Toyota Production System, or lean production system as it is commonly termed, I quickly learned that in numerous aspects, and particularly in the results (cost, leadtime, and quality), the lean business model far exceeded traditional manufacturing and business techniques. In fact, the results were not even close. So while learning the application of the lean business model through actual implementation on the shop floor and related business functions, I began to research the history of this business model, and not just through the history of Toyota but the source of Toyota’s knowledge.

This journey took me back to the American Industrial Revolution, as many elements of this unique business model are grounded in the developments derived from the work accomplished during this period in the United States (approximately 1840 to 1920). The pinnacle of the Industrial Revolution was reached and manifested at the Ford Motor Company’s Highland Park Plant, the home of the Model T. The Toyota (Production System) business model is a direct descendant and extension of the model developed and used at Ford’s Highland Park Plant.

What does this have to do with accounting, or more specifically traditional accounting and lean accounting? In simple terms traditional accounting are methods derived out of abstraction. Standard costing, in its variety of forms, is a method of measuring operational abstractions; that is, it does not measure reality. Whether it is based in labor hours, machines hours or any such standard, standard costing does not record the actual (reality) resources which are being consumed for a specific product or product family in the process of its manufacture. Let me stressed that again – standard costing does not calculate the actual internal cost of your product. It is an abstraction. Therefore, using it to measure and make decisions is dangerous and verges on insanity. Labor hours or machines hours are used as a proxy to calculate internal costs, but since they do not reflect actual consumption of resources – all resources used, the results are false information.

Implementing the lean business model, or operational flow (once-piece flow), and aligning production along value streams producing one-by-one production, or as utterly close to this as currently possible, resources are aligned to the consumption utilized by the process for manufacturing products. Because the change of physicality of production of directly aligning resources used to produce products, calculating these resources become completely direct and very simple. In this sense, the reality of consumption of resources can be very simply collected and calculated. This, in a simple sense, is lean accounting. Often this aspect of lean accounting is referred to as value stream costing. While it is not the totality of lean accounting, it is the foundation to lean accounting. It gives the ability for reality accounting, and removes abstraction accounting.

The Highland Park Plant used a version of this, as does Toyota in their decision-making processes for financially based decisions. Using reality for decisions instead of abstractions always leads to wiser and more sounds decisions, and, as a result, builds a better organization.

 

Join the conversation!

We have no tolerance for comments containing violence, racism, vulgarity, profanity, all caps, or discourteous behavior. Thank you for partnering with us to maintain a courteous and useful public environment where we can engage in reasonable discourse.

Sorry. No data so far.

The Affluent Mix

Become An Insider!

Sign up for Affluent Investor's free email newsletter and receive a free copy of our report, "The Christian’s Handbook For Transforming Corporate America."