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Kaizen costing is the process of continual cost reduction that occurs after a product design
has been completed and is now in production. Cost reduction techniques can include working
with suppliers to reduce the costs in their processes, or implementing less costly re-designs of
the product, or reducing waste costs.
Kaizen costing is a cost-reduction system that is applied to a product in production. It comes
from the combination of the Japanese characters kai and zen which mean change and
good, respectively. The word Kaizen translates to continuous improvement or change
for the better and aims to improve productivity by making gradual changes to the entire
manufacturing process. Some of the cost-reduction strategies employed involve producing
cheaper re-designs, eliminating waste and reducing process costs. Ensuring quality control,
using more efficient equipment, utilizing new technological advances and standardizing work
are additional elements.
Yashihuro Moden defines kaizen costing as "the maintenance of present cost levels for
products currently being manufactured via systematic efforts to achieve the desired cost
level." The word kaizen is a Japanese word meaning continuous improvement
Moden has described two types of kaizen costing: Asset and organisation specific kaizen
costing activities planned according to the exegencies of each deal - Product model specific
costing activities carried out in special projects with added emphasis on value analysis
Kaizen costing is applied to products that are already in production phase. Prior to kaizen
costing, when the products are under development phase, target costing is applied. To
understand Kaizen costing, one first needs to grasp standard costing methodology. The
typical standard costing approach works by designing a product first, and computing costs by
taking into account material, labor and overhead. The resulting figure is set as the product
cost. The standard cost is set and revised on a yearly basis. Cost deviation analysis involves
checking to see whether the projected cost estimates tally with the final figures.
Manufacturing procedures are assumed to be static.
Finally, It is a process wherein a product undergoes cost reduction even when it is already on
the production stage. The cost minimization can include strategies in effective waste
management, continuous product improvement or better deals in the acquisition of raw
materials.
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The organisation should always seek perfection. Since perfection is never achieved,
there must always be scope for improving on the current methods.
The search for perfection should be ingrained into the culture and mindset of all
employees. Improvements should be sought all the time.
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Individual improvements identified by the work force will be small rather than farreaching.
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(1989) the amount of kaizen cost is decided in kaizen costing process and it is determined as
under:
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supervisors involve in the cost-reduction activities and they work in their own ways. The
previous cost of product is used as a starting baseline for kaizen cost reductions.
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Kaizen costing is applied by value analysis. In kaizen costing kaizen targets are set for all
plants and manufacturing processes. Cost of raw material is significant for cost reduction and
it can be reduced by better manufacturing processes. Purchased tools or items for product are
generally not allocated cost reduction targets for cost reduction point of view these can be
purchased at a low price with suppliers negotiation. Other variable cost is mainly centre of
attention for cost reduction in kaizen costing which are reduced through value analysis. Fixed
costs are not part of cost reduction. The cost reduction target rates are generally fixed for
each product component and department only small changes are made in these rates (Monden
& Lee, 1993). The company wide cost reduction target amount is allocated to each plant and
these assigned target cost reduction rates in each plant may be higher or lower than
the company wide rate (Monden & Lee, 1993). During decomposition of cost reduction
targets different meetings are held at different levels of each plant for best allocation
of targets
(Monden & Lee, 1993). The total company wide target cost reduction target is actually
decomposed among all cost elements. The kaizen cost improvement activities are very
specific for every department in the company. Monden & Lee (1993) described those
Japanese automobile companies like Daihatsu Motor Corporation prepares following six
plans for cost reduction for the application of kaizen costing.
Production, distribution and sales plan for expected margins from sales of product.
Projected parts and material costs plan for purchasing department.
Plant Rationalization plan for variable cost reduction in manufacturing processes.
Personnel plan for labour cost reduction.
Facility investment plan for depreciation and purchase of fixed assets.
Fixed expense plan for non manufacturing costs reduction.
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Establishing all the elements of the supply chain, inclusive for the suppliers of parts
and collaborators, the objective of the continuous search of opportunities for reducing
costs.
Mobilization and motivation of all the competencies within an organization via a
transversal approach, thus favoring competitiveness.
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Kaizen Costing
Cost variance analysis involving Cost variance analysis involving kaizen cost targets
standard costs and actual costs
and actual cost reduction amounts
It checks the cost deviation and It investigates and responds when kaizen cost
corrections are made when standard target amounts are not attained.
costs have not been achieved.
In the procedures of standard system
standard costs are set for one or two
times every year means annually or
semiannually.
Not special activities are performed to Carries out kaizen activities during the entire
achieve costs.
operational year
Table: Differences between kaizen costing and standard costing methods
Source: Adapted from Monden (1995), Monden & Lee (1993)
ABC
Kaizen Costing
Within cost system
Outside of cost system
Long term
Short term
Connection is made through Connection through cost accounting
cost accounting
is not critical
Fixed costs
Variable costs
Transactions
are
directly Transactions are not directly related
related to cost accounting
to cost accounting
Use activity cost drivers and Use performance measures
performance measures
Comprehensive
cost Tool for motivation and enforcement
accounting and management
methodology
Potential Advantages
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Potential Disadvantages
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Conclusion
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The current speed of the globalization process facilitated by rapid advances in information
technology (ICT) has posed a serious challenge for 21st century corporations. Thus, corporate
survival is a function of the extent to which organizations react positively to economic and
corporate troughs (Ekwueme, Egbunike, & Onyali, 2013).
In this vein, Managing cost of production is at the focal point of present day management, as
organizations compete in a highly turbulent environment managers are constantly seeking for
cost reduction systems to implement. Kaizen is an excellent way to formalize some simple
improvement activities that are not always run in an optimal format. Kaizen also avoids the
stigma of a formalized project that may be drawn out over several weeks or months. Most
importantly, Kaizen provides just-in-time process improvements. By using the above 10-step
methodology, ensuring the relevant parties are participating and empowered, and that those
steps not able to be completed in the event are completed within 30 days, Kaizen can enable
significant and sustainable improvements to any organization.Kaizen costing is based on the
belief that nothing is ever perfect, so improvements and reductions in the variable costs are
always possible. Kaizen is a way of thinking and this philosophy can be applied at any
business. In some studies both kaizen and kaizen costing concepts were considered similar
but kaizen costing is different from kaizen. Kaizen costing is an important branch of this
concept and it follows the kaizen philosophy. Kaizen concept includes continuous
improvement in any field and kaizen costing is mainly related with cost improvement.
Kaizen costing is an emerging method for change in an effective way and for continuous
cost improvement. The secret of success of Japanese firms was the application of Kaizen
philosophy and kaizen costing is accepted as improved part of this concept. Kaizen
costing is implemented in business with the determination of cost reduction targets and
with the involvement of all levels employees. Kaizen costing assists in continuous cost
reduction with positive changes in possible areas. Kaizen costing is also different from
innovation and cost control technique standard costing. Kaizen costing is worldwide accepted
by manufacturing firms as an effective and optimistic way of working for continuous cost
improvement. Kaizen costing is an economical way of improvement and unlike innovation
it requires less funds and unlike standard costing it controls the costs of production
with maintenance of existing performance level. Kaizen costing is better than innovation
for change and better than standard costing to reduce costs of product. In competitive
environment kaizen costing may be used by manufacturing firms as a better way of working
for change and continuous cost improvement.
References
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