Kaizen costing

Kaizen costing is a method of reducing managing costs. It's also referred to as continuous improvement costing. The method is aimed at cost reduction below standard level, but without negative effects on quality, staff, safety, etc.

The idea is similar to target costing, where managers try to achieve the result with lower resources. However, target costing is used on design stage, while kaizen costing - during the manufacturing stage. What's more important, kaizen costing requires high involvement of employees, while target costing - only some designers.

Kaizen costing is a cost management method that is often used in manufacturing and production environments. It is based on the principles of the Japanese philosophy of "kaizen," which emphasizes continuous improvement and the involvement of all employees in the improvement process. The goal of kaizen costing is to reduce costs by identifying and eliminating waste and inefficiencies in the production process. This is typically done through a series of small, incremental changes, rather than through large-scale, disruptive changes. By involving all employees in the process, kaizen costing aims to create a culture of continuous improvement in which everyone is constantly looking for ways to improve efficiency and reduce costs.

Types of kaizen costing

There are two approaches to kaizen costing:

• Asset-specific kaizen costing is a method of cost management that focuses on improving the efficiency and productivity of specific assets or equipment within a production process. This approach involves identifying the specific assets that are causing inefficiencies or high costs, and then implementing changes to improve their performance. For example, if a particular machine is causing delays or breakdowns, kaizen teams may focus on improving its maintenance schedule, making adjustments to its settings, or even replacing the machine with a more efficient one.
• Product-specific kaizen costing is a method of cost management that focuses on improving the efficiency and productivity of the production process for a specific product or product line. This approach involves analyzing the entire production process for the product, identifying areas of waste and inefficiency, and then implementing changes to improve the process. For example, if a particular product line has high scrap rates, kaizen teams may focus on identifying and eliminating the causes of the scrap, such as defective raw materials or production methods.

Both asset-specific and product-specific approaches to kaizen costing share the same goal to identify and eliminate waste and inefficiencies in the production process, but they differ in their focus on a specific area of the production process.

Kaizen costing example

An example of kaizen costing in practice is a manufacturing company that produces a specific product. The company realizes that the product has a high scrap rate, which is causing high costs. The kaizen team conducts a thorough analysis of the production process for this product and identifies that the main cause of the high scrap rate is a lack of proper training for the workers who are assembling the product.

The kaizen team implements a series of changes to address this issue, including:

• Providing additional training for workers on how to properly assemble the product
• Implementing a visual management system to help workers identify and correct errors during assembly
• Implementing a "stop the line" policy, which allows workers to stop the assembly process if they notice a problem, without fear of being penalized
• Setting up a suggestion box for workers to provide feedback on the assembly process
• Regularly review of the scrap rate and cost of the product

As a result of these changes, the scrap rate for the product decreases significantly, resulting in cost savings for the company. Additionally, the visual management system and the "stop the line" policy help the company to identify and correct errors in real-time, further reducing the scrap rate and costs.

The kaizen team also continues to monitor the production process and encourages workers to provide feedback and suggestions for further improvements. This approach ensures that the company can continue to improve the efficiency of the production process and reduce costs over time.

Types of costs considered in kaizen costing

In kaizen costing, various costs are analyzed to identify areas of waste and inefficiency. These costs include:

• Direct materials cost: the cost of all raw materials used in the production process.
• Direct labor cost: the cost of all labor used in the production process, including wages, benefits, and training.
• Overhead costs: the indirect costs associated with the production process, such as utilities, maintenance, and equipment rental.
• Scrap and rework costs: the costs associated with materials or products that do not meet quality standards and need to be scrapped or reworked.
• Inspection and testing costs: the costs associated with inspecting and testing materials and products during the production process.
• Quality control costs: the costs associated with maintaining and improving the quality of products and materials.
• Maintenance costs: the costs associated with maintaining and repairing production equipment and facilities.
• Inventory costs: the costs associated with storing and managing inventory, including materials, work-in-progress, and finished goods.

By analyzing these costs, kaizen teams can identify areas of waste and inefficiency, and then implement changes to reduce costs and improve the efficiency of the production process.

Standard vs. kaizen costing

The standard costing is approach to control costs looking at variances in comparison to actual costs. That becomes cause of the main criticism of standard costing. Managing by exceptions (only in case of variance) is not efficient enough. Kaizen costing goes further and improves costs continuously.

Kaizen costing	Standard costing
Cost reduction targets are set and applied monthly	Standards are set annually or semi-annually
Variance analysis involves target Kaizen costs versus actual cost reduction amounts	Variance analysis involves comparing actual to standard costs
Investigation occurs when target reductions are not attained	Investigation occurs when standards are not met

Kaizen cost targets

Targets for kaizen costs are set monthly based on following procedure:

1. Per product actual cost in the previous year = total actual cost of last year / actual production in last year
2. Estimated amount of total current year actual cost = Per product actual cost in the previous year * Estimated production for the current year
3. Kaizen cost target for the current year = Estimated amount of total current year actual cost * Ratio of cost reduction target
4. Assignment cost to each plant = Cost directly controlled in single plant / cost directly controlled in all plants
5. Kaizen cost target for each plant = Kaizen cost target for the current year / Assignment ratio

The Kaizen costing can use Hoshin kanri approach of bottom-up path, where lower managers propose reduction levels. This however requires highly engaged staff.

Kaizen costing vs. target costing

Kaizen costing and target costing are two different cost management strategies that organizations can use to manage their costs. Kaizen costing is a cost management strategy that focuses on continuously improving processes and reducing costs. This approach uses small, incremental changes in the processes to reduce costs. It focuses on eliminating waste, streamlining processes, and improving productivity. Kaizen costing is an ongoing process and can be used to improve any aspect of a business’s operations, from production to customer service.

Target costing, on the other hand, is a cost management strategy that focuses on setting a target cost and then designing a product to meet that cost. This approach involves looking at the cost of producing a product and then setting a target cost that is lower than the cost of production. The organization then works to design a product that meets the target cost. This approach can be used to design a product to meet customer requirements while still keeping costs low.

Both Kaizen costing and target costing can be effective cost management strategies, but the two approaches have different goals and different approaches to cost management. Kaizen costing is an ongoing process that focuses on continuous improvement and cost reduction, while target costing focuses on setting a target cost and designing a product to meet that cost.

Kaizen costing principles

• It lays no emphasis on the present existing situation, by disregarding all ideas implemented in the production process;
• The system does not strive for perfection, rather seeking gradual improvements in the existing situation, at an acceptable cost;
• It allows managers to exercise discretion in the application of their knowledge and personal skills;
• It encourages collective decision—making, i.e. the ideas of many are better than that of one single person;
• There are no limits to the level of improvements that can be implemented.
• Kaizen involves setting standards and then continually improving these standards to achieve long-term sustainable improvements.
• The focus is on eliminating waste, improving processes and systems and improving productivity.
• Involves all employees and all areas of the business.

Advantages of Kaizen costing

There are several advantages of using kaizen costing as a cost management method:

• Continuous improvement: Kaizen costing encourages a culture of continuous improvement, in which everyone is constantly looking for ways to improve efficiency and reduce costs.
• Involvement of all employees: Kaizen costing involves all employees in the cost management process, which helps to create a sense of ownership and commitment among the workforce.
• Reduced costs: By identifying and eliminating waste and inefficiencies in the production process, kaizen costing can help to reduce costs and improve the bottom line of the company.
• Increased productivity: By improving the efficiency of the production process, kaizen costing can help to increase productivity and improve the quality of products.
• Flexibility: Kaizen costing is a flexible method that can be applied to any type of production process, whether it is a manufacturing, service, or administrative process.
• Focus on customer satisfaction: Kaizen costing emphasizes the importance of meeting customer needs, and encourages teams to focus on improving the customer experience.
• Better communication: Kaizen costing promotes better communication among employees, creating a more cohesive and effective team.
• Quality improvement: Kaizen costing emphasizes the importance of quality and encourages teams to focus on improving the quality of products and services.
• Better problem-solving: Kaizen costing promotes problem-solving and critical thinking, encouraging teams to identify and address problems in a structured and systematic way.
• Long-term sustainability: Kaizen costing creates a culture of continuous improvement that helps companies to become more efficient and sustainable over the long-term.

Limitations of Kaizen costing

While kaizen costing can be an effective cost management method, there are also some limitations to consider:

• Time-consuming: Conducting a thorough analysis of the production process and identifying areas of waste and inefficiency can be time-consuming and requires a significant investment of resources.
• Resistance to change: Some employees may be resistant to changes in the production process and may be unwilling to participate in kaizen teams.
• Limited scope: Kaizen costing is typically focused on specific areas of the production process or specific products, and may not address broader organizational issues.
• Limited cost savings: While kaizen costing can help to reduce costs, the savings may be limited, especially if the company is already operating at a high level of efficiency.
• Dependent on human factors: The success of kaizen costing depends on the willingness and involvement of employees and managers, if these factors are not present, it may be harder for the company to achieve the desired results.
• Complexity: Kaizen costing can be complex and requires a significant amount of data and analysis, which can be challenging for some companies to implement.
• Short-term focus: Kaizen costing is typically focused on short-term improvements and may not address long-term strategic issues.
• Limited scalability: Kaizen costing is typically implemented on a small scale and may be difficult to scale up to a larger operation.
• Limited applicability: Kaizen costing is mainly applicable in manufacturing and production environments, and may not be as effective in other types of businesses.

It's important to keep in mind that, while kaizen costing can be a valuable cost management method, it may not be the best solution for every company or every situation. It's important to weigh its potential benefits against the limitations and decide if it's the right approach for your organization.

Kaizen costing — recommended articles

5S method — Toyota production system — World class manufacturing — Continuous improvement — Total quality control — Six sigma — Quality assurance — Philip B. Crosby — 10 kaizen principles

References

• Miazi M.R., A Study on Kaizen Costing: Continuous Cost Improvement
• Granja, A. D., Picchi, F. A., & Robert, G. T. (2005). Target and kaizen costing in construction. In 13th International Group for Lean Construction Conference: Proceedings (p. 227). International Group on Lean Construction.
• Modarress, B., Ansari*, A., & Lockwood, D. L. (2005). Kaizen costing for lean manufacturing: a case study. International Journal of Production Research, 43(9), 1751-1760.