Kaizen costing

From CEOpedia | Management online
Kaizen costing
See also

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.

Types of kaizen costing

There are two approaches to kaizen costing:

  • Asset specific - all improvement activities are related to reduction of use of chosen asset or resource
  • Product specific - improvement activities are related to different resources related to one product

Types of costs

The main types of cost that should be reduced are:

  • Working with suppliers to reduce costs in supply chain
  • Costs of product redesign
  • Waste
  • Legal costs
  • Recruitment and training costs (more effective methods of training)
  • Manufacturing costs (using learning curve effect)
  • Marketing, sales, distribution
  • Disposal

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 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.

Kaizen costing example

The general idea of kaizen costing is to determine target costs, design product and process to not exceed those costs, and finally - improve it to decrease costs. The process starts with determining competitive price. According to it, the target profit and cost are determined. The costs can be e.g.:

  • Business costs,
  • Design costs,
  • Employee costs,
  • Supply costs,
  • Planning costs,
  • Maintenance costs,
  • Improvement costs.

Those costs should be determined in the first phase of the project. Then, during the design and tests phases the team should search for opportunities to lower the costs. The next phase is production, where the production team should search for another possibilities of cost decrease.

Advantages and disadvantages of Kaizen costing

The main advantages are:

  • Encouraging and empowering employees lead to better results
  • Employee suggestion system helps to find ways of cost reduction
  • Lean thinking helps reducing resources absorption

The potential disadvantages are:

  • Kaizen is a permanent change system
  • Kaizen can increase the burden on lower level of management
  • Kaizen costs can lead to diminishing returns if not implemented wisely


Author: Slawomir Wawak