a.  A lean information system should provide value to the users of the system. Key principles are the elimination of waste, speed of information flow, and clarity.

Elimination of waste – A lean system seeks to eliminate all waste. In an information system, waste is created by errors in the information, which means that incorrect information is used and wrong decisions may be taken.

Alternatively the information has to be corrected when the error is identified, and this results in a cost of correction. Correcting errors does not add value, because the error should not have occurred, and correcting errors is a wasted effort.

Efficiency in the flow of information – A lean manufacturing system is one in which there is an efficient flow of items though the manufacturing process. In a lean information system, there should be an efficient flow of information.

Information should be available to individuals when they need it, and there should not be unnecessary delays in providing it or making it available.

While efficiency in the flow of information means that information should be available when it is needed, it should not be provided before it is needed.

Information should be available „just in time‟. This is the concept of pulling items through the system rather than pushing them through. If information is provided before individuals are ready to use it, it does not have value.

Clarity is also an element of lean information. Information must be clear to the people who use it and should therefore be presented in a form that they can understand and use. If information is presented in a form that is difficult to understand, it does not have value.

Together, the elimination of waste, efficiency of information flow, and clarity of information are qualities of an information system that give value to the information that the system produces.

b. There are several reasons why KK’s current management accounting system does not fulfil the requirements of a lean information system.

Errors —There are many errors in the data capture from the cost accounting system. Errors represent waste in the system, by providing incorrect information about costs, or requiring correction when the errors are found. Errors also reduce the confidence of users in the information that the system provides.

„Push‟ system – Monthly variance reports are provided but not until two weeks after the end of the month. There are two weaknesses in this reporting system.

The first is the delay in making information available if required. The information about performance is being held by accountants and is not made available to the managers who can use it.

The second problem is that the information is pushed out to management in the form of monthly variance reports, when it would be more appropriate to make the information available when management want to use if for monitoring and control purposes. The information system is dictating how and when the information should be used, whereas management should be doing this.

Not encouraging lean manufacturing – more fundamentally, it can be argued that traditional cost and management accounting methods provide managers with inappropriate information that encourages the wrong sorts of management for an organisation that uses lean manufacturing methods. A key feature of lean manufacturing is the elimination of inventory, because holding inventory is wasteful. Absorption costing, however, encourages manufacturing at full capacity, even if this means manufacturing items that are not yet needed by customers, so that inventory will build up. This is because high volumes of production reduce the unit costs of manufacture by spreading overhead costs over a larger volume of output.

Variance reporting of efficiency also encourages greater volumes of output, because greater efficiency means faster production. When the work force is paid a fixed wage or salary, attempts to improve efficiency will result in greater production quantities, and a build-up of inventory.

The current reporting systems therefore encourage managers to control operations in a way that is inconsistent with lean manufacturing.

c. Error reduction – To create a lean management accounting system, waste must be eliminated, and information flow improved. The causes of the data errors in data capture are not known. The problem may be the use of manual documentation for recording costs, or errors in input by inadequately trained staff. Methods of recording costs should be investigated, and the target should be to eliminate input errors entirely.

Flows of information – The flow of information must be improved, so that up-to-date information is available to management when they want it. The speed of entering data into the accounting system should be reviewed, and the aim should be to minimise the delay between recording data and inputting it into the accounting system. Automated methods of monitoring inventory movement or recording labour times may be considered.

User access to information – The accounting system should also allow managers on-line access to information about costs, so that they can obtain and use the information they need at a time that they need it. This should apply to senior management as well as to management at the operational level.

Cost allocation – The information provided by the accounting system should be reviewed, and absorption costing should be abandoned. There may be some value in using activity-based management to monitor and control overhead costs, but the most important requirement should be to value inventory at direct materials cost. This means that there will be no incentive to produce at high-capacity volumes or operate at unnecessary levels of efficiency. Favourable capacity and efficiency variances will not affect inventory costs and so will not improve management performance.

Performance measures – Different items of information should be provided for performance measurement purposes. Traditional performance measurement methods for materials – price and usage variances – should be used to control materials costs. For labour, however, non-financial measures of performance may be appropriate, such as production cycle times of throughput times and the ratio of idle time to active time for the work force. The company is considering JIT purchasing for its main suppliers: if so, a suitable measure of performance may be the order-to-delivery cycle time for purchase orders.

In a lean information system, information should have a practical use and support the aims of management. The management accounting system should be changed so that it provides value – a practical purpose, with no waste, rapid information flow and clarity of meaning.