What is Kaizen Costing?

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.

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.

In contrast, Kaizen costing is based around improving the manufacturing process on a continual basis, with changes being implemented throughout the year. Cost-reduction targets are set on a monthly basis. The goal here is to reduce the difference between profit estimates and target profits. The cost deviation analysis done in Kaizen costing examines the difference between the target Kaizen costs and the actual cost reduction achieved. The basic idea here is to make tiny incremental cost reductions on a continual basis in a product's life cycle.

Since the goal is to reduce costs on a monthly basis, every department in the company makes an effort to introduce operational changes on a daily basis. The Kaizen approach calls for analyzing every part of the process and generating ideas on how they can be further improved. Kaizen costing takes into account aspects such as time-saving strategies, employee efficiency and wastage reduction while incorporating better equipment and materials.

The fundamental basis of the Kaizen approach centers around recognizing that employees who work on a particular job are aware of how that particular task can be greatly improved. They are then empowered to do so in the Kaizen costing system. Employees are treated as valuable sources of viable solutions, an approach that differs greatly from the standard cost system that views employees as laborers with variable performance levels.