Kaizen Costing is a cost management strategy focused on continuous and incremental cost reduction throughout the production process. The term “Kaizen” comes from Japanese, meaning “continuous improvement.” This costing method aims to improve efficiency, reduce waste, and enhance productivity without compromising quality.
Key Features of Kaizen Costing
- Continuous Cost Reduction
Instead of setting a fixed cost target, Kaizen Costing continuously strives to reduce costs through small, incremental improvements.
- Employee Involvement
Encourages workers at all levels to participate in identifying cost-saving opportunities.
- Process Improvement Focus
Unlike traditional costing methods that focus on setting cost targets during product design, Kaizen Costing emphasizes cost reduction during production.
- Elimination of Waste
Reduces unnecessary costs by improving workflows, reducing defects, and optimizing resource utilization.
- Short-Term & Ongoing Strategy
Works continuously throughout the product’s life cycle rather than making one-time cost reductions.
How Kaizen Costing Works
Kaizen Costing operates in three key steps.
Identifying Cost Reduction Targets
- The company sets realistic but challenging cost-reduction goals.
- Targets are based on past performance, industry benchmarks, or expected improvements.
Implementing Cost Reduction Measures
- Employees suggest and implement small improvements.
- Techniques such as Lean Manufacturing, Just-in-Time (JIT), and Total Quality Management (TQM) are used.
- Focus areas include reducing material waste, improving labor efficiency, and streamlining production.
Monitoring and Continuous Improvement
- Performance is regularly reviewed to ensure cost targets are met.
- Variance analysis is conducted to track improvements and identify new cost-saving opportunities.
- Lessons learned are integrated into future production cycles.
Types of cost under consideration
Kaizen costing takes into consideration costs related to the manufacturing stage, which include:
- Costs of supply chain
- Legal costs
- Manufacturing costs
- Waste
- Recruitment costs
- Marketing, sales and distribution
- Product disposal
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 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.
Benefits of Kaizen Costing
Cost Savings
- Achieves lower production costs without sacrificing quality.
Higher Productivity
- Encourages efficiency and streamlined operations.
Employee Empowerment
- Workers feel valued and motivated to contribute.
Waste Reduction
- Helps minimize defects, downtime, and excess inventory.
Better Competitiveness
- Continuous cost reduction allows companies to offer competitive pricing.
Conclusion
Kaizen Costing is a powerful tool for cost management, focusing on continuous improvement rather than drastic changes. By involving employees, reducing waste, and enhancing efficiency, businesses can achieve long-term cost savings and maintain competitiveness. However, it requires commitment, patience, and a culture that embraces innovation.
