Traditional accounting methods grew up with traditional mass production, not lean production, so when manufacturers embrace lean techniques, they need a new approach to cost accounting.

Reduced inventory levels of effective lean manufacturing make it tough to measure financial progress with the product-oriented focus of traditional cost accounting. Lean accounting techniques concentrate on process rather than product.

Activity-based costing, known as ABC, recognizes that costs are not directly linked to sales or production volume, but result from a diverse range of activities that need to be individually understood in relation to products, customers, and markets. Using sophisticated software, ABC analysis reveals the true cost of production across the entire range of business activities – from sales to billing.

ABC analysis does not replace traditional accounting, but restates much of the same data in the context of operating relationships. Using computer software that maps process costs over many dimensions, ABC makes it possible to analyze profitability of a product line in categories as narrow as stock-keeping units or as broad as the entire product line, geographic market, or distribution channel.

Examining costs with this emphasis on activities and processes sometimes exposes hidden pockets of low profit and sometimes reveals that product lines thought to be marginal producers are in fact high performers. ABC can also reveal inconsistent pricing and discount structures that suppress profit potential, and it can highlight promising new market opportunities.