Kaizen Costing

Kaizen costing is an extension of target costing, in which the focus is on cost reduction.

Refer to Target Costing for more information.

Kaizen is the Japanese word for continuous improvement; therefore kaizen costing refers to continuous improvement during manufacturing.

There are 2 sub-cycles in this approach. The first one is the kaizen/ continuous improvement cycle, whereby annual goals are established as part of the planning process. The ultimate goal is cost reduction, and actions and strategies are planned in order to achieve the goal. This could be in the form of more streamlined processes, more efficient use of materials, etc. As with value engineering (see here for more explanation), the costs of existing products/processes are reduced by reducing non value-added costs (which do not add value to the product from the customer’s viewpoint).

In time, workers become more familiar in the new strategies and actions and the cost reduction is “locked in”.

This is taken further in the second sub-cycle, the maintenance cycle, which maintains the cost reduction at the new standard/level.

But that’s not the end of the story. Remember that kaizen is all about continuous improvement, so we go back to the kaizen cycle in which further cost reductions are planned and implemented, via more efficient and cost-saving strategies. These improvements are again “locked in” via the maintenance cycle.

This goes on and on throughout the life cycle of product/service, or indeed as long as manufacturing processes are continued.

Note: eventhough we’ve discussed the use of kaizen in manufacturing processes, any small business can utilize it. It is a cost reduction mindset which is continuous – the goal posts are constantly moving further.

For example, in your business, think of what can be cut out or reduced. Are there are ways to be more efficient? Can time be reduced in any actions taken? Can a process be made to achieve more than 1 objective? Can the work of a staff be structured in such a way to help him to do more without much additional effort?

Return to Introduction to Management Accounting from Kaizen Costing.

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