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What Is Lean Accounting?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 11 September 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Lean accounting is an approach to the accounting process that involves the close consideration of the use of resources in order to take advantage of opportunities that might be overlooked otherwise. Considered essential if a business wishes to engage in what is known as lean manufacturing, this type of business and accounting strategy will go beyond simply looking at the usual cost of doing business and require the business owner to consider if certain types of business deals will generate an equitable amount of additional returns without resulting in an unreasonable amount of additional expense. The lean accounting approach can sometimes allow a business to determine that entering into a contract with a large customer and offering volume discounts as part of the contract terms does make sense, even if standard accounting practices indicate otherwise.

One of the easiest ways to understand how lean accounting functions is to identify the average costs involved with producing units of a specific product. Typically, those costs will be based on what the company must pay for raw materials, labor, and the general cost of production. In order to adequately cover those costs, a standard unit price is set for the sale of each item produced. Unless other arrangements are made, that standard price holds true for all sales, allowing the company to make a profit from each sale that takes place.

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Should a client wish to place a high volume order for that product and desire the extension of a unit price that is below the standard pricing, the company will use lean accounting to determine if that desired price is workable. As part of the process, the accounting will look closely at the current costs and determine which of those would increase in order to meet the additional demand. If it is discovered that the units necessary to fill the customer order can be produced with no increase in labor costs and only a minimal increase in the cost of raw materials, recalculating the average cost of production per unit may reveal that the company can in fact accept the order, cover all expenses associated with producing the additional units, and still make some sort of profit.

Lean accounting methods can also reveal that accepting a volume order is not in the best interests of the business, at least from a financial perspective. When the evaluation of expenses that would be incurred by the increased production needed to fill the order indicates that little to no variation in the standard average cost occurs, this means that the company would stand to earn nothing on the order, and possibly even lose money if the order is filled at the rate requested by the prospective client. Unless lean accounting methods can show that it is possible to make up the difference elsewhere in the revenue stream of the company and make use of the deal to secure additional clients at more lucrative terms, declining the order may be the best approach.

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