There are different costing systems prevailing in the practice: traditional costing method, Activity

based costing, JIT costing, target costing etc. Lean accounting is another one that is still not well
known and therefore low in practice. Companies adopt one of the above costing methods
according to their management policy and practices. Each costing method has certain advantages
and limitations over others. Therefore, the selection of the best accounting method is a crucial
one. Here, we take in-depth comparative analysis of Lean accounting and ABC accounting:
Lean accounting is a new way of treating the different costs that categorizes them on the basis of
value stream. It includes everything done to create value for a customer that can be reasonably
associated with products or services. Lean production is a philosophy of production that
emphasizes the minimization of the amount of all the resources (including time) used in the
various activities of the enterprise. It involves identifying and eliminating non-value-adding
activities in design, production, supply chain management, and dealing with customers through
the simplification of all manufacturing and support processes. (Blackstone and Cox 2005)
Therefore it leads to good decision making and motivation to lean improvement across the entire
value stream. Further a better accountability is made to the firms profitability and the cost
incurred. A better cost management and control is practiced through lean accounting. Through
the lean improvement, wastage can be easily eliminated and available unused capacity is created
in the form of machine time, labors time etc. Therefore, management becomes able to use the
freed capacity in productive way. With relevant and actionable information, management got
capable to improve the business process at every stage of organization. In addition, lean
accounting is complied with generally accepted accounting principal (GAAP), so there is no
opportunity for regulation breach and mismanagement of accounting figures. In a nut shell, we
can say that lean accounting is basically a strategy rather than manufacturing tactics or a cost

reduction program. Its main focus is to add customer value by reducing the process to core value
and eliminate the waste of any capacity by using it in some other productive activities. It helps in
increasing the cash flow and value for the stock holders. However there are some criticisms
against the implementation of lean accounting. Since lean manufacturing results in reduction of
inventories that can cause a reduction in income due to additional flow of overhead costs under
absorption costing. So it seems that lean manufacturing is actually increasing the cost thus
convey a negative message to the stakeholders. Second, lean manufacturing process aims at
reducing the wastage through better use of excessive capacity but this excessive capacity needs
to be better capitalized through additional volume of work otherwise no real reduction in cost
will be realized.
Activity based costing (ABC) is a process of allocating the overhead costs on the basis of
different activities. Thus it is a more accurate way of allocating the costs and different overheads
are allocated on the basis of appropriate cost drivers. For example, machine setup cost can be
allocated on machine hours, Inspection cost on the basis of the number of inspections etc.
Therefore more accurate product costing helps to determine the price of products or service more
accurately. However, ABCs costing has certain limitations. It is expensive to use and some
arbitrary overhead costs continue to go along to the product cost. ABC method is complicated
and time consuming. According to Kaplan (2004), ABC approach works well in a limited
setting but difficulties arise when you try to roll this approach out on a large scale for use on an
ongoing basis. ABC doesnt give the real numbers that can drive a better decision.
In summary, ABC accounting is based on following concepts:

Overhead costs are incurred during the manufacturing or production process.

Cost drivers are the actual activities that cause the total cost on activity cost pool to

increase.
Allocation of overhead costs must be allocated uniformly on the basis of different
activities at best possible to determine the actual products cost.

According to Bill Wadlell (2009), Lean Accounting is the only approach to manufacturing
accounting that will give you accurate, relevant information. It is based on the following
principles:

The accounting process must be based on cash as cash is only the real money.

Allocation of overhead cost is meaningless and inaccurate.

The value Streams concept rather than cost centers support the cost accumulation.

Conclusion:
Lean accounting and ABC accounting both have their own advantages and limitations. Lean
accounting is comparatively new concept. It is beyond of cost accounting and management. It
doesnt focus only on allocation of overheads and minimization of costs but it sets a long term
strategy of overall productions processes. Continuous improvement is the key element of lean
accounting. In dynamically changing business environment when service or production is
required to be flexible, every employee should think in a cost cutting way. Lean accounting is
overall cultural change which is always difficult and durable process and it demands a strong
leadership. Thus a CEO should have capability of lean thinking so he can drive the management
team effectively and then lean accounting would be successful.