Lean Finance and Operations

In today’s unpredictable economic climate, with inflation driving up the cost of materials, labor, and overhead, finance leaders are being pushed to revisit how they measure and manage costs. For decades, standard costing has been the dominant cost accounting method in manufacturing and production-oriented companies. But in inflationary times—when efficiency and responsiveness are more important than ever—lean costing is gaining attention as a more agile and decision-useful alternative.

So, what’s the difference between the two? And which approach is better suited for navigating periods of economic turbulence?

What is Standard Costing?

Standard costing involves assigning expected (or “standard”) costs to products, including materials, labor, and overhead. These standard costs are predetermined based on historical data, market trends, and production forecasts. Companies then compare these standard costs with actual costs to calculate variances—favorable or unfavorable—which are analyzed and used for performance management and decision-making.

Standard costing has long been popular because it simplifies budgeting, pricing, and cost control. It creates a baseline that allows managers to monitor deviations and drive accountability. However, the method has its limitations, especially when the business environment changes rapidly—as it often does during inflation.

The Problem with Standard Costing During Inflation

Inflation wreaks havoc on the assumptions underpinning standard costing. When prices for raw materials or wages increase sharply, standard cost variances skyrocket. Variance reports begin to reflect outdated standards rather than actionable insights. For example, a company might see unfavorable material price variances month after month—not because of poor procurement, but simply because the standard hasn’t caught up to the new market reality.

Moreover, standard costing can incentivize the wrong behaviors. To reduce unfavorable variances, teams might push for larger batch sizes to absorb fixed overhead more effectively or delay necessary maintenance to reduce reported costs—both of which are contrary to lean principles and long-term value creation.

As Dr. H. Thomas Johnson, co-author of Relevance Lost: The Rise and Fall of Management Accounting, argues, “Traditional costing systems like standard costing no longer reflect the real economic forces affecting the modern production environment.”

What is Lean Costing?

Lean costing, often referred to as value stream costing, aligns with lean manufacturing principles. Rather than focusing on individual products and departments, lean costing organizes costs by value streams—end-to-end processes that deliver value to the customer. It emphasizes actual costs over standard costs and tracks expenses in real time without burdening the system with complex variance analyses.

Lean costing eliminates many of the allocations and overhead absorption rules required by standard costing. It simplifies reporting and focuses on what matters: customer value, flow efficiency, and waste reduction.

Why Lean Costing Works Better in Inflationary Times

Focuses on Flow and Responsiveness In inflationary environments, speed and flexibility become essential. Lean costing helps organizations identify where delays, excess inventory, and overproduction are creating cost pressure. It prioritizes flow rather than cost absorption, ensuring resources are used where they add value. Real-Time Visibility Lean accounting delivers current financial insights, not after-the-fact variances. In times of rapid inflation, this allows leaders to make quicker, more informed decisions—whether it’s adjusting pricing, renegotiating supplier contracts, or shifting production schedules. Encourages Lean Behavior Standard costing can push teams toward maximizing output to reduce per-unit costs. Lean costing, on the other hand, supports just-in-time production, minimizing waste, and aligning teams with continuous improvement.

A Real-World Example: Toyota and the Lean Mindset

Toyota, a pioneer of lean manufacturing, moved away from traditional cost accounting decades ago. According to Jean-Marie Book, author of Toyota Kaizen Methods, Toyota’s approach to financial decision-making is grounded in simplicity and relevance. Rather than obsessing over product-level cost variances, Toyota tracks performance by process and uses real-time feedback loops to improve flow, reduce waste, and maintain profitability—even under economic stress.

But It’s Not One-Size-Fits-All

That said, lean costing isn’t always easy to implement. It requires a cultural shift, changes in reporting structures, and buy-in across operations, finance, and leadership. Companies heavily reliant on regulatory cost tracking, such as defense contractors or those subject to GAAP and IFRS inventory rules, might still need to maintain elements of standard costing.

Some hybrid models exist, where companies use lean costing internally for decision-making and maintain standard costing externally for compliance and financial reporting.

Making the Right Choice for Your Business

If your organization operates in a high-volume, repetitive environment and is already on a lean transformation journey, lean costing may offer significant advantages in inflationary times. On the other hand, if your systems, incentives, and reporting are deeply embedded in standard cost structures, a full shift might be too disruptive in the short term.

As Brian Maskell, lean accounting expert and author of Practical Lean Accounting, notes, “Lean costing provides clarity, speed, and relevance—but it only works if your processes are lean too.”

Conclusion

In inflationary times, the need for agile, real-time, value-focused decision-making has never been greater. While standard costing provides structure and control, it often fails to keep pace with volatile input prices and shifting market dynamics. Lean costing, with its emphasis on actual costs, customer value, and process flow, presents a compelling alternative—especially for organizations that have embraced lean thinking across their operations.

Ultimately, the best cost management approach depends on your operational maturity, industry demands, and strategic goals. But one thing is clear: in times of inflation, static assumptions and backward-looking metrics are no longer enough. Finance must evolve to support agility, efficiency, and real-time insight—and lean costing can be a powerful tool to do just that.

References

– Johnson, H. Thomas, and Kaplan, Robert S. Relevance Lost: The Rise and Fall of Management Accounting. Harvard Business School Press, 1987.

– Maskell, Brian, and Baggaley, Bruce. Practical Lean Accounting: A Proven System for Measuring and Managing the Lean Enterprise. Productivity Press, 2006.

– Bicheno, John, and Holweg, Matthias. The Lean Toolbox: The Essential Guide to Lean Transformation. PICSIE Books, 2016.

– Book, Jean-Marie. Toyota Kaizen Methods: Six Steps to Improvement. Productivity Press, 2012.