SOLUTIONS

Microsoft Dynamics AX
®

Lean Accounting
User Guide

Date: August 2009

http://www.microsoft.com/dynamics/ax
Table of Contents
Introduction ................................................................................................ 3
Assumptions ........................................................................................................................ 4
Lean Accounting in Microsoft Dynamics AX ............................................................................... 4
Functionality ..................................................................................................................... 4

Warehouse Value Stream (Dimension) ....................................................... 5

Functional Description ........................................................................................................... 5
Setup .................................................................................................................................. 6
Basic Flow ............................................................................................................................ 7
Purchase order lines ........................................................................................................... 7
Sales order lines ................................................................................................................ 8

Lean Stock Postings .................................................................................... 8

Functional Description ........................................................................................................... 8
Stock Model Group ................................................................................................................ 9
Lean Journals ......................................................................................................................10
Lean Stock Postings .............................................................................................................11

Cost Substitution ...................................................................................... 13

Functional Description ..........................................................................................................13
Example .......................................................................................................................... 14
Basic Flow ...........................................................................................................................16

Subcontracting .......................................................................................... 17
Functional Description ..........................................................................................................17
Subcontract Only .............................................................................................................. 17
Final Process .................................................................................................................... 18
Part Process ..................................................................................................................... 18
Transactions .................................................................................................................... 19
Setup .................................................................................................................................19
Basic Flow ...........................................................................................................................20

Black Hole ................................................................................................. 21

Functional Description ..........................................................................................................21
Setup .................................................................................................................................22

Conclusion ................................................................................................ 24
Lean Parameters ..................................................................................................................24
Conclusion ..........................................................................................................................24

LEAN ACCOUNTING
Introduction
Lean accounting is a general term that is given to accounting, control, measurements, and
management methods that truly reflect lean practices, such as lean manufacturing, lean logistics, lean
product design, and so on.

The vision of lean accounting is based on being able to:

1. Provide accurate, timely, and understandable information to motivate the lean transformation
throughout the organization and support decision making leading to increased customer value,
growth, profitability, and cash flow.

2. Use lean tools to eliminate waste from the accounting process while maintaining thorough
financial control.

3. Fully comply with the GAAP, external reporting regulations, and internal reporting
requirements.

4. Support the lean culture by motivating investment in people, providing information that is
relevant and actionable, and empowering continuous improvement at every level of the
organization.

The following table highlights principles, practices, and tools to use to obtain the lean vision:

Principles Practices Tools

Lean and simple business Elimination of waste Value stream
accounting (transactions/reports/accounting mapping, continuous
methods) improvement, lean
problem solving
(PDCA)
Accounting processes that Continuous improvement, cost Value stream-based
support lean transformation management, value addition performance
measurement/income
statements/costing

Clear and timely communication
of information
Simple reporting and use of visual Cash-based simple
tools to report financial and statements. Reporting
nonfinancial measures on nonfinancial
measures, such as
customer
satisfaction/on time
delivery/increase in
capacity, and so on

Planning (lean) Planning and budgeting/future Value stream-based

state/invest in people planning (not
departments).
Continuous
participation of
employees

LEAN ACCOUNTING
Internal accounting control Lean operational Process maps showing
controls/inventory valuation control points/simple
inventory valuation
using visual controls

Assumptions
This guide is not designed to outline the lean accounting principles for an organization but to make the
reader aware of the various options that are available in the lean accounting functionality in Microsoft
Dynamics AX 2009.

This document assumes that the reader is well acquainted with the processes that are defined in the
training manuals and is generally familiar with the workflow of transactions in lean manufacturing.

The reader should especially be well versed with the working of various types of kanbans,
subcontracting, and black hole functionalities that are defined in lean manufacturing before reading
this document.

This document is not designed to train the reader in the logistical processes of lean but to highlight
the financial impact of these processes and the lean accounting processes to support them.

Lean Accounting in Microsoft Dynamics AX

Lean accounting in Microsoft Dynamics AX is based on the fundamental principles that are outlined in
the Introduction.

There are several functionalities that are developed that help the organization in its lean
transformation. These functionalities are to be used alongside the standard Microsoft Dynamics AX
functionalities of dimensions, allocation, costing methodology, and so on, to design the lean
accounting functionality in Microsoft Dynamics AX for any organization.

Functionality
1. Warehouse as value stream

2. Lean stock postings

3. Conversion factors

4. Cost item substitution

5. Subcontracting

6. Black hole

7. Lean accounting parameters

Lean accounting does not stand alone, but it is enabled by lean production methods. It only works
when lean processes are stable and under control.

The introduction of lean methods brings inventory down and creates short production cycles. In

LEAN ACCOUNTING
absolute lean, the kanbans, pull system, and performance measurements create operational control.
The velocity of inventory is faster than the time taken to record it, and therefore, there is very little
inventory to record. This is mainly done by visual control and simple inventory reports.

However, until this level of lean control has been established, the traditional transactions are still
needed. The inventory levels are still high, which therefore needs to be valued as per GAAP.
Therefore, removing the traditional accounting control processes needs to be balanced with the level
of lean transformation in the organization, and it would be wrong to remove these processes too soon.

The functionalities that appear in the preceding list give the reader the necessary tools to make
gradual changes in the lean accounting policies, depending upon the maturity path of the organization
in lean transformation, and still allow the reader to fulfill the legal and corporate reporting
requirements.

Warehouse Value Stream (Dimension)

Functional Description
One of the fundamental tools of lean thinking is value stream mapping. Because lean thinking is
customer focused, and the aim is to add maximum value to customers, therefore, the value stream
represents all of the things that we do to create value for the customer.

Lean then focuses on performance measurements in the value stream. It is in the value stream that
we can identify and banish the waste and therefore, increase the value to the customer.

As organizations are undergoing transformation, lean accounting moves from product costing to value
stream costing and from department income statements to value stream-based income statements.

In Microsoft Dynamics AX, we use a dimension called value stream that can then be subsequently
linked to transactions to obtain performance measurement by value stream.

In Lean, work cell performance measurements (individually or as a group) are a key performance
indicator, and in lean manufacturing, all work cells are linked to warehouses. Therefore, we have the
ability to link warehouses against a value stream.

LEAN ACCOUNTING
Another example of a value stream in Lean could be product family, which can be obtained by linking
items to the dimension value stream.

Multiple value streams can be attached to a transaction by using more than one dimension. For
example, on a purchase order line we could link the product family value stream by linking it to the
item and a work cell value stream by identifying where this material is being consumed in the
production process. In this example, we would need two dimensions in the system, which can be set
up as product family and work cell, independent of each other.

Setup
Under Lean manufacturing>Setup>Lean Order Parameters>Module tab, select Lean accounting
and also select the Dimension for lean accounting that will be used as a value stream here. This is the
dimension that should be linked to the warehouse in the following table.

The dimension that is linked to the warehouse gets the highest priority (before item/customer/vendor)
in Microsoft Dynamics AX transactions.

If there is no dimension linked to the warehouse, then Microsoft Dynamics AX uses the dimension
from the item, customer, vendor, work center, and so on.

These dimensions are then used to make accounting entries in the ledger, thereby identifying the
financial bookings by value stream.

Because there can be many dimension types in Microsoft Dynamics AX, you could design the system
to pick for each transaction a dimension type from warehouse and another from item.

LEAN ACCOUNTING
Basic Flow

Purchase order lines

When a purchase order line is entered and there is a dimension that is linked to the warehouse, then
the line obtains its dimension from the warehouse.

If there is no dimension linked to the warehouse, it would obtain it from the item.

If there is no dimension linked to the item, it would obtain it from the purchase order header.

If there is no dimension linked to the purchase order header, it would remain blank.

LEAN ACCOUNTING
Sales order lines

When a sales order line is entered and there is a dimension that is linked to the warehouse, then the
line obtains its dimension from the warehouse.

If there is no dimension linked to the warehouse, it would obtain it from the item.

If there is no dimension linked to the item, it would obtain it from purchase order header.

If there is no dimension linked to the purchase order header, it would remain blank.

Note: The same rules apply to stock journals and production orders.

Lean Stock Postings

Functional Description
This section describes the various measures that can be taken in Microsoft Dynamics AX to direct
accounting bookings to different ledger accounts, depending on your lean setup.

Often during the Lean pilots stages, there are certain parts of the organizations that are undergoing
lean transformation.

Therefore, it is essential to segregate the financial booking that is generated by these transactions to
be able to carry on with traditional accounting measures for other parts of the business. As they
undergo further transformation, more cells can be brought under the lean umbrella.

This is achieved as explained in the following sections by using lean specific journals for transactions
with their own set of account mapping.

Also in an Absolute Lean Model, lots of financial entries are generated by reports. Therefore, it is

LEAN ACCOUNTING
essential to be able to segregate from the reports the origin of such transactions by value stream.

Stock Model Group

In a lean environment when the inventories are very low, the organization may decide to switch off
the financial posting that is created by stock transactions. When the inventory is low and under visual
control, there is no need in Lean to have a perpetual inventory system. It is common for lean
companies to expense all purchases and then to make month-end adjustments to bring the inventory
value into the balance sheet. However, to be able to do that, your WIP and raw material inventories
should be really low.

This approach in Microsoft Dynamics AX does not give real-time stock accounting figures. They are
obtained by various value stream analysis or physical inventory reports by value stream from Lean
Manufacturing.

Organizations that use this method ensure that the value stream costing is as accurate as it can be
because that forms the basis for inventory valuation in finance.

LEAN ACCOUNTING
Lean Journals

A default journal for various transactions can be set up under Lean manufacturing>Setup>Kanban
parameters.

These journals could be of Profit and Loss Type/Movement Type/Transfer, and so on, depending on
the nature of the transaction.

A more specific journal can be set up in the Kanbans form for a specific combination of item-work cell.

10

LEAN ACCOUNTING
These journals allow better visibility in the system for lean transactions.

The bookings that are generated for these transactions use the Lean – kanban empty tab and Lean –
black hole tab as shown in the following section.

Using the Journal Type=Movement allows additional choice of account for the offset account.

Lean Stock Postings

The Lean – kanban empty table and Lean – black hole tab have been introduced to map accounts for
some of the Lean transactions.

11

LEAN ACCOUNTING
When a kanban is emptied in the preceding form, it creates a Lean-Profit and Loss Journal based on
the default value in Lean parameters or the specific value at Kanban parameters. It uses the accounts
that are set up under the Lean - kanban empty tab to make the financial bookings for this Profit and
Loss Journal.

This is particularly useful when certain items are used as raw materials Lean Pilot Cells and also used
in traditional manufacturing in the organization.

The set up of accounts would depend on the Cost Substitution and Exclusion from Backflushing setup
that are defined.

12

LEAN ACCOUNTING
Similarly, the Lean – black hole tab is used when Lean transactions are generated between a Black
Hole warehouse (Item-Warehouse) and another stock warehouse.

When stock is transferred from a Black Hole to a Non-Black Hole warehouse, then this generates Stock
journals as set up in the Lean Parameters to create stock in the Non-Black Hole warehouse.

Similarly, when stock is moved from Non-Black Hole to a Black Hole warehouse, then this generates
Stock journals to reduce the stock in the Non-Black Hole warehouse.

Cost Substitution
Functional Description
Backflushing only works when the bills of material are accurate and scrap reporting is effective. When
they are not, it creates logistical issues on the shop floor because there are physical quantities to
backflush but none in the system, thereby either causing negative inventories in the system or
stopping the further progress of the production order.

As we make further progress in lean transformation, and Lean Manufacturing and Purchasing methods
are introduced in the value stream and the pull systems and kanbans bring inventory under visual
control, the need to track the inventory diminishes on the computer system, and there is no need to
maintain perpetual inventory by backflushing in the computer systems.

However, to maintain the costs of the finished goods and sub assemblies and to value inventory, we
substitute the cost of the material, which was not backflushed by a cost substitution item.

The cost substitution item is used to accumulate the costs of all materials that were not backflushed,
and allows lean accounting to report more accurate stock values without interfering with the lean
manufacturing processes.

However, using this method would not allow any recalculation/closing adjustments to reflect on the
transactions, because the material consumed on the production order (that is, Cost Item) is different
than the purchased item on the BOM. As in lean, we are not trying to capture the most accurate costs
at the product level but at value stream level. Therefore, if the purchased items are booked in the

13

LEAN ACCOUNTING
correct value stream, then any adjustments that are made would also be done at the value stream
level.

Example

Bill of Materials

Finished Good
(A)

Sub assembly Raw Material (C)

(B)

Production BOM

Finished Goods
(A)

Cost Substitution

In the preceding example, if Sub Assembly=USD 10.00 and Raw Material (C)=USD 5.00, then if they
were backflushed, then the cost of finished goods would be USD 15.00.

The cost of non-backflushed material is replaced by cost substitution in Production BOM, thereby
allowing the cost of the finished goods to remain at USD 15.00 without backflushing (or consuming)
any material on the production order.

14

LEAN ACCOUNTING
The default item for substitution is linked on the Lean manufacturing>Setup>Lean order
parameters>Module tab.

A more specific cost item for all items can be set up at the item level. For substitution of costs on a
production order, the system would look for a specific cost item, and if not set up, would use the one
from the parameter as shown in the preceding screen shot.

The items can also be marked for Exclude from Cost Item Backflushing here, which would then allow
the items to still be excluded from backflushing but not cost substituted.

The BOM lines can also be marked for Exclude from backflushing. This is useful when the same raw
material item is used in Lean Pilot Cells and it is not backflushed but is backflushed for other finished
goods production.

15

LEAN ACCOUNTING
We should also ensure that the cost price of the cost substitution item (ProdCost) in our example is
set to USD 1.00, and the stock model is set for Standard cost price.

Basic Flow

16

LEAN ACCOUNTING
When a production order is raised for an item (CEI-TT023 in the preceding example), and the raw
materials in its BOM line are excluded from backflushing and substituted by a cost item (billetcost in
the preceding example), then the program first calculates the total material cost for excluded items.

It then replaces the Production BOM line for those items with the substituted item.

It uses the material cost amount calculated to replace the quantity in the Production BOM for the cost
substituted item.

So in the preceding example, the material cost, which was excluded from backflush, was USD 1.1160.

Therefore, in the Production BOM line for Billetcost, the quantity to be consumed is shown as 1.1160.

When this is multiplied with the Std Cost of Billetcost Item (USD 1.00), it gives the Amount to be
consumed=USD 1.1160, the same if the items were actually backflushed.

When the production order is costed, it therefore consumes the cost substitution item instead, and
calculates the accurate cost of the finished goods based on the BOM.

The raw materials are subsequently consumed when the kanban is empty.

Subcontracting
Functional Description
The subcontracting functionality in lean manufacturing is used to facilitate the transfer of stock from
lean system to the subcontractor sites, where operations can be done on the products and then
subsequently received back in the lean system.

Item A Payment Item

Item B Item C Subcontract Cost

From a lean manufacturing perspective, there are several types of subcontracts, depending on the
logistical process. These are as follows:

Subcontract Only
For this subcontract type, ignore Item C as shown in the preceding diagram.

1. Kanban becomes empty for A.

2. Send ticket to supplier. (Material B is already at the subcontract warehouse, or it is transferred

at this stage.)

17

LEAN ACCOUNTING
 3. Subcontractor performs the operation to make A and returns A.

4. Product is received on Kanban Manufacturing, which creates a production order in Microsoft

Dynamics AX and consumes the material from the subcontract warehouse. It also creates a
purchase order for the subcontracting operation.

In this scenario, we need to be able to cost A accurately. Although there is no logistical requirement
for the Subcontract Cost item on the BOM, Lean Costing would need it to be able to include the cost of
the subcontracting for Item A.

The payment item that is linked to Item A (through Kanban Parameters) is used to create a purchase
order (based on blanket order prices) against which the Suppliers Invoice for Subcontracting services
will be matched.

Depending on organizations needs for visibility, the payment item and subcontract cost item can be
one and the same, can be uniquely identifying the subcontracting operations, or can just be a default
item for all.

Final Process
1. Kanban becomes empty.

2. Work is done on A within Lean work cells. Item C is consumed.

3. Send ticket to supplier to make A. (Material is transferred at this stage.)

4. Subcontractor performs the operation and produces A.

5. Subcontractor returns A. In Microsoft Dynamics AX, materials are consumed by using a BOM
Journal. B is consumed from the subcontract warehouse, and C is consumed from the Lean
warehouse.

6. Kanban is received. This creates transactions (Production Order/Transfer Order) that

consume/transfer A from the subcontract warehouse and produce/transfer it into the Lean
warehouse. It also creates a purchase order for the subcontracting operation.

Part Process
1. Kanban becomes empty.

2. Send ticket to supplier. (Material is already at the subcontract warehouse, or it is transferred

at this stage.)

3. Subcontract performs the operation and produces A.

4. Subcontractor returns A. In Microsoft Dynamics AX, materials are consumed by using a BOM
Journal. B is consumed from the subcontract warehouse, and C is consumed from the Lean
warehouse.

5. Further work is done on A within Lean work cells, and C is physically consumed.

6. A is complete and kanban is received. This creates transactions (Production Order/Transfer

Order) that Consume/transfer A from the subcontract warehouse and produce/transfer it into
the Lean warehouse. It also creates a purchase order for the subcontracting operation.

18

LEAN ACCOUNTING
Transactions
In both (Final/Part) processes, there are materials/operations (C) consumed either before (Final)
or after (Part) the subcontractor performs its operation. In Microsoft Dynamics AX, the inventory
for A is created during this subcontract operation (BOM Journal), and the remaining transactions
are used to transfer them from the subcontract warehouse to the Lean warehouses (work cells).

Therefore, inventory is recognized either later (Final) or earlier (Part) in the system.

Therefore, Part process/Final process can only be used where lean transformation is mature
enough that such timing differences are very small, thereby not being materially significant from a
lean accounting perspective.

Therefore, from a lean accounting perspective, there are three critical aspects of subcontracting.
These include the following:

 Ensure that accurate product costs are reflected in the item, and it includes the
subcontracting cost by using a subcontracting item on the BOM.

 The Financial Account that is used for Subcontracting Item (Credit Account) in the BOM
Journal is the same account that is set up in Purchase Receipt (Debit) for this item, so that
they offset each other.

 Timing differences between physical consumption and consumption are registered in the
system.

Setup

The preceding screen shot shows how the items in a work cell are linked to various subcontract types.

19

LEAN ACCOUNTING
On the Subcontract tab, you set the subcontract warehouse where this item is produced by using a
BOM Journal. The Subcontractor’s (Vendor) account and the Blanket order from which the
Subcontractor operation price is obtained. The Payment Item is used to create a Purchase Order for
the operations by using the prices that are set up in the Blanket Order.

The Subcontract Receive method (Production/Transfer) decides if the item will be received back in
Lean Work cells by using Production or Transfer Orders.

The Subcontract Kanban type decides if it is a consignment warehouse, which means that the material
that subcontractor needs already exists in the warehouse, or they are transferred along with the
kanban ticket.

Basic Flow

This form is used to send the kanban ticket to the subcontractor. This is also used when the kanban is
firmed.

20

LEAN ACCOUNTING
This form is used to receive the item back from the subcontractor.

Black Hole
Functional Description
When Lean evolves to a stage where the analysis is based on gross inputs and outputs, then the lean
transformation starts utilizing the Black Hole concept.

In Lean, any transaction made within the Black Hole does not generate any Microsoft Dynamics AX
transactions.

However, when transactions are made between Non-Black Hole-Black Hole entities, Microsoft
Dynamics AX transactions are generated to record them in Non-Black Hole entities.

For example, when raw materials are transferred from a Non-Black Hole warehouse to a Black Hole
warehouse, they are registered in the system by using a Stock Journal to book from Raw Material
stock to the Black Hole.

Similarly, when the finished goods are transferred from a Black Hole to Non-Black Hole warehouse,
they are registered in the system by using a Stock Journal to book from the Black Hole to the finished
goods warehouse account.

21

LEAN ACCOUNTING
Setup

Black Hole can be set up at the warehouse level. When the warehouse is marked as Black Hole, then
all transactions related to this warehouse are affected.

22

LEAN ACCOUNTING
A specific item and a work cell can also be marked as a Black Hole. In this case, only that item follows
the rules set up by Black Hole, that is, no transactions in that warehouse. However, other items would
still continue to create transactions.

When transactions are generated between Non-Black Hole and Black Hole entities, it looks at the
Stock Posting tab (Lean-Black Hole) for account mapping. It also uses the Stock Journals that are set
up under Lean manufacturing>Setup>Kanban parameters.

23

LEAN ACCOUNTING
Conclusion
Lean Parameters

The lean accounting parameters are set up under Lean manufacturing>Setup>Lean order
parameters.

Lean accounting is a primary parameter and must be selected for any lean accounting functionality to
work.

Cost Item backflushing when selected allows the substitution of Cost Item for items that are excluded
from Backflushing.

Conversion costing when selected allows the use of Conversion Factors by Value Stream and uplifts
the cost of production by the Conversion Factors.

Conversion cost to all levels when selected allows the Recalculation/Closing routine to go back to all
BOM levels to identify any change in material content that would affect the conversion cost amount.

Conclusion
Various tools in lean accounting in Microsoft Dynamics AX have been defined in the preceding
sections.

However, the mix of options that are most suited for any organization depends on the state of lean
transformation within the organization.

The Ledger Account mappings as required in Lean and set up under the Stock Postings would vary
from customer to customer based on the mix of options that are chosen.

Customers who are close to an Absolute Lean Model would opt more for a model where the stock is
not booked in real time into financial accounts, but made as month-end bookings that adjust the stock
and cost of sales.

As during lean accounting, is a gradual transformation, and it is very essential that these changes are
done at the right time. During the initial stages where Lean Manufacturing changes are being done at
the shop floor, we still use various tools (conversion factor, cost item substitution) and so on to

24

LEAN ACCOUNTING
capture the product costs in the system and to value inventory accordingly. But with further progress
of Lean, and the inventories becoming lower, these methods change and we move more towards the
Black Hole and Absolute Lean Model.

25

LEAN ACCOUNTING
Microsoft Dynamics is a line of integrated, adaptable business management solutions that enables you and your
people to make business decisions with greater confidence. Microsoft Dynamics works like and with familiar
Microsoft software, automating and streamlining financial, customer relationship and supply chain processes in a
way that helps you drive business success.

U.S. and Canada Toll Free 1-888-477-7989

Worldwide +1-701-281-6500
www.microsoft.com/dynamics

The information contained in this document represents the current view of Microsoft Corporation on the issues discussed as of the
date of publication. Because Microsoft must respond to changing market conditions, this document should not be interpreted to be a
commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information presented after the date of
publication.
This document is for informational purposes only. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, AS
TO THE INFORMATION IN THIS DOCUMENT.
Complying with all applicable copyright laws is the responsibility of the user. Without limiting the rights under copyright, no part of
this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means
(electronic, mechanical, photocopying, recording, or otherwise), or for any purpose, without the express written permission of
Microsoft Corporation.
Microsoft may have patents, patent applications, trademarks, copyrights, or other intellectual property rights covering subject
matter in this document. Except as expressly provided in any written license agreement from Microsoft, the furnishing of this
document does not give you any license to these patents, trademarks, copyrights, or other intellectual property.

© 2008 Microsoft Corporation. All rights reserved.

Lean Manufacturing for Microsoft Dynamics AX 2009, Microsoft, the Microsoft Dynamics Logo, FRx, Microsoft Dynamics, SharePoint,
Visual Basic, Visual Studio, Windows, and Windows Server are either registered trademarks or trademarks of Microsoft Corporation,
FRx Software Corporation, or Microsoft Business Solutions ApS in the United States and/or other countries. Microsoft Business
Solutions ApS and FRx Software Corporation are subsidiaries of Microsoft Corporation.

26

LEAN ACCOUNTING