KAIZEN COSTING

BY GROUP 1

SECTION B

FLOW Kaizen Kaizen Costing Important Points Steps Choice of Perspective Customer Value Kaizen Costing v/s Standard Costing Concerns Benefits

KAIZEN“improvements in small steps”.

A Japanese term for making improvements to a process through

small, incremental amounts rather than through large

innovations.

KAIZEN COSTING Developed by Yashuhiro Monden in Japan.

Can be translated as “enhancement estimation”.

Most consistent with the saying “slow and steady wins the race”.

KAIZEN COSTING

KAIZEN COSTING A process of cost reduction during

the manufacturing phase of an existing product. It refers to continual and gradual improvement through small betterment activities, rather than large or radical improvement made through innovation or large investments in technology.

KAIZEN COSTING

ManufacturingCycle

RD&E Cycle

Post ServiceCycleKaizen Costing

IMPORTANT POINTS

Kaizen costing’s goal is to ensure that actual production costs are less than the prior year costs.

Similar to target costing in its cost-reduction mission.

However, it focuses on reducing costs during the manufacturing stage of the total life cycle of a product.

Investment estimates are available in advance. It is tied to the profit-planning system.

IMPORTANT POINTS

The time prior to kaizen costing is called Target costing, which involves searching for a target cost for a product before it reaches the market.

Together these two concepts make up lifecycle costing.

IMPORTANT POINTS

The target-reduction rate is the ratio of the target reduction amount to the cost base.

Cost sustaining period allows employees to learn new procedures before Kaizen targets are imposed.

As much as 80% of lifecycle costs are determined when production begins.

STEPS When planning, a cost target is set and a gap occurs. Establish why the goal was set and what are the

possibilities of reaching the target. Cost reductions are broken down into smaller

reductions. New cost applies on the day of activity. Each activity bears its own investment estimate

prepared in advance. Finally resources are allocated.

CHOICE OF PERSPECTIVE

Commonality, i.e., is economies of scale possible? Suppliers and their added value? Technology, logistics, packaging, investment? Can improvements be made in purchasing function? What about production, maintenance, planning? Can the work be organized differently? Do we have the right customers?

CUSTOMER VALUE Keep in mind the customer value.

STANDARD COSTING V/S KAIZEN COSTING

STANDARD COSTING V/S KAIZEN COSTING

Standard Costing

1. Cost-control system concept.2. Assumes stability in current manufacturing process.3. Goal is to meet cost performance standards.

Kaizen Costing

1. Cost-reduction system concept.2. Assumes continuous improvements in manufacturing.3. Goal is to achieve cost reduction standards.

STANDARD COSTING V/S KAIZEN COSTING

Standard CostingTechniques1. Standards are set annually or semi- annually.2. Variance analysis involves comparing actual to standard costs.3. Investigation occurs when standards are not met.

Kaizen CostingTechniques1. Cost reduction targets are set and applied monthly.2. Variance analysis involves target Kaizen costs versus actual cost reduction amounts.3. Investigation occurs when target reductions are not attained.

STANDARD COSTING V/S KAIZEN COSTING

Who has the best knowledge to reduce costs?

Standard CostingManagers andengineers developStandards.

Kaizen CostingWorkers are closestto the process andthus know best.

CONCERNS Often viewed as reactionary not value adding. The system places enormous pressure on employees

to reduce every conceivable cost. The product is already in the manufacturing

process, thus it is difficult and costly to make large changes to reduce costs.

The cost of disruptions to production may be greater than the savings.

BENEFITS Competence development is long term. Result is ability to survive in short run. Every activity is supported by work team that

shares the result. Rewards the group working with cost

rationalization.