A Study on Kaizen Costing: Continuous Cost Improvement

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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Characteristics of Kaizen Costing
Rof (2012) identified the following characteristics as ensuring the successfulness of the
Kaizen Costing approach:

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 decisionmaking, 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 Costing also includes following characteristics:

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.

Illustration - Kaizen
Many Japanese companies have introduced a Kaizen approach:
In companies such as Toyota and Canon, a total of 60-70 suggestions per employee
are written down and shared every year.
It is not unusual for over 90% of those suggestions to be implemented.

What is continuous improvement?

Continuous improvement is the continual examination and improvement of existing processes
and is very different from approaches such as business process re-engineering (BPR), which
seeks to make radical one-off changes to improve an organisation's operations and processes.
The concepts underlying continuous improvement are:
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.
Individual improvements identified by the work force will be small rather than far-
reaching.

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 Figure: Factors under Kaizen

Eliminating waste
Kaizen costing has been developed to support the continued cost reduction of existing
components and products. Cost reduction targets are set on a regular, e.g. monthly basis and
variance analysis is carried out at the end of each period to compare the target cost reduction
with the actual cost.
One of the main ways to reduce costs is through the elimination of the seven main types of
waste:
Over-production - produce more than customers have ordered.
Inventory - holding or purchasing unnecessary inventory.
Waiting - production delays/idle time when value is not added to the product.
Defective units - production of a part that is scrapped or requires rework.
Motion - actions of people/equipment that do not add value.
Transportation - poor planning or factory layout results in unnecessary transportation
of materials/work-in-progress.
Over-processing unnecessary steps that do not add value.

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Identifying Topics for Kaizen
Here are some common themes that may be addressed for Kaizen:
Improving customer forms received in good order.
Improving first time call resolution in a call center.
Streamlining the order to payment process in purchasing.
Streamlining the reporting of hours worked to payroll.
Reducing time to hire and onboard new employees.
Reducing the submission to completion cycle time for facilities requests.
Co-designing forms or content (for a web application) with the largest single user
(this may be an external Kaizen with great partnering opportunities).

Kaizen and Kaizen Costing Connection

Kaizen means improvement in small steps was developed for quality improvement. On the
basis of kaizen concept, Yashuhiro Monden, from Japan, developed the kaizen costing
concept which is translated as enhancement estimation. Literature stated that kaizen
philosophy ensures continues improvement by sustaining the process of cost reduction in
manufacturing phase. Kaizen basically assume that every worker of company knows how the
task is undertaken and whether there is any better way of doing it. It is not so much a costing
routine as the outcome of developing an organizational culture of collaborative learning at all
levels of the company. Kaizen is based on thought and action through work-teams to search
for improvement. Kaizen system has precise cost improvement activities for each department.
Kaizen costing comprises cost reduction activities requiring changes in the manner a
company manufactures existing products. Kaizen is the process of seeking continuous
improvement. Kaizen involves small improvements as result of constant efforts of all level
employees and it works on PDCA (Plan, Do, Check, Act) concept. Literature states that when
any Japanese company follows the Plan, Do, Check and Act thinking, then firstly under this
philosophy they find a problem raised in the company like producing non standard product,
then after identification of problem management makes a plan for this, finally taking a
solution to beat the problem and changing the work procedures to remove the problem. The
managers apply the kaizen tool PDCA (Plan, Do, Check, Act) cycle for kaizen costing
implementation. Kaizen costing removes non-value added cost. Hassen & Mowen (2003)
described two recurring major sub-cycles in cost reduction process (1) continuous
improvement cycle and (2) maintenance cycle. According to Hassen & Mowen (2003)
continuous improvement cycle is defined by a plan-do-check-act sequence (PDCA).
Improvement refers to activities directed towards maintaining operating standard situation in
good condition and upholding such standards through training and discipline (Jagdeep &
Harwinder, 2009). According to Hassen & Mowen (2003) the maintenance cycle follows a
traditional standard-do-check-act sequence (SDCA). Jagdeep & Harwinder (2009) defined
that maintenance refers to activities directed towards to inspiring current standards. The
important aspect of kaizen is improved the business and product elements such as quality,

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cost, delivery etc. Quality improvement in terms of product features, cost improvement in
terms of production cost and delivery improvement in terms of on time distribution of
product. The improvement of cost part is done by controlling and reducing cost inadequacy.
For this kaizen costing technique can be used to reduce the production cost and improve the
product quality. Thus, kaizen term is used for whole organization for continuous
improvement and kaizen costing is the part of kaizen term which is used for continuous cost
reduction for existing products and it is based on the ideology of kaizen. In some previous
studies kaizen term is also used for kaizen costing.

Computation of Kaizen Cost Targets

Japanese companies computed the kaizen profit or profit improvement on the basis of
difference between target profits determined by top managers and estimated profit determined
by the lower level managers. Japanese automobile companies considered that cost reduction
in variable and fixed cost is necessary for cost savings. They think that kaizen cost reduction
can be achieved through the variable cost reduction in mainly manufacturing department and
in non manufacturing departments but kaizen cost amount for fixed costs can also be decided.
The kaizen costing takes last years actual cost as base for cost reduction, and then a kaizen
costing goal is established for the specific cost reduction rate during the current year. The
actual cost which has taken as base now compared with the preset kaizen costing cost
reduction goal. At the end of the current year the actual cost of this current year will become
the cost base for the next year, and in next year new lower kaizen cost reduction rates are set
and cost reduction efforts are continued in the organization. The kaizen cost reduction goals
are met through the removal of non value added activities costs, elimination of wastes and
improvement in time management. The improvement suggestions given by employees are
also taken sincerely by management, who implement these suggestions or ideas. Kaizen
costing provides continually more competent and cost-effective production process (Hilton et
al., 2006).
The ratio of cost reduction target is determined in considering kaizen profit and generally it is
ten percent. After three months of the start of production of new product after the use of
target costing process the next cost is reduced through the kaizen costing method. After this
the kaizen cost targets for each plant is decomposed among different divisions and smaller
units of the plants and these kaizen cost targets are achieved through daily kaizen activities.
The kaizen cost targets are decided in the kaizen cost committee and managers determine
policies (mainly non monetary measures) to achieve the kaizen cost targets. In kaizen costing
process through the assignment of kaizen cost targets to different departments company can
maintain the accounting control and the quality aspect can be achieved through the shop floor
members activities. The shop floor members are involved in daily kaizen activities through
suggestion schemes and quality circles. Therefore, kaizen costing helps in both shop floor
control and accounting control. According to previous studies like Tanaka (1990), Monden
(1989) the amount of kaizen cost is decided in kaizen costing process and it is determined as
under:

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Table: Computation of kaizen cost targets
Source: Adapted from Monden & Hamada (1991)
Kaizen Costing Application Process

After a product is introduced, customers want increase in value of the product over time by
greater value and lower cost. Plan of business demand a chain of incremental cost reductions
(like 5% in a year) to stay in competition and cost-reduction activities are not ended with the
completion of product design, they move to a new phase. The kaizen costing process is
important and it is interactive process between management and work group employees. The
kaizen costing method uses the target cost for cost reduction and it is calculated according to
the principle of the standard cost. Kaizen costing system intends to reduce actual cost lower
than standard costs and to achieve cost reduction targets. This system defines the yearly
standard costs and checks the difference between standard and actual costs. When standard
costs are not achieved then reasons are try to find out then accordingly decisions are made.

1. Setting Cost Reduction / Kaizen Cost Targets

In kaizen costing cost reduction targets are set for the product. The overall cost-
reduction target is generally set at factory level then these targets are decomposed to
departments and workgroups levels. When cost reduction targets are fixed the work
groups are empowered with enough freedom to achieve these targets. Generally in kaizen
costing only those product costs (variable cost) are considered, which can be openly
controllable by the shop floor workers in company. The shop floor workers and
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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Figure: Cost reduction target or kaizen costing setting paths
Source: Modified from Modarress et al. (2005)

In kaizen costing management team leader sets cost-reduction goals for production processes
and gives freedom to the workforce to find new ways to achieve these goals. To achieve cost
reduction goals which are generally not easy but attainable, workers take a variety of a ctions
and find new ways to speed up manufacturing processes. This system starts when there is a
gap between total actual cost and kaizen cost, like equation:

(Total Cost Kaizen Cost = Gap).

According to Modarress et al. (2005) there are two ways to set kaizen cost targets in
the company namely top down path and bottom up path. In the first way cost reduction
targets are set by senior management according to the plans of the top management then their
cost reduction target are accepted by kaizen teams after discussion. In the second way cost
reduction targets are set by kaizen team members then the team presents their cost reduction
targets for the approval of top and senior management.

2. Consideration of Variable and Fixed Costs

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

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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.

Figure: Kaizen costing process

Source: Own calculation of the researcher

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 The application of the Kaizen Costing (KC) method involves the improvement of the
production process via (Budugan & Georgescu, 2009):
Optimization of the launch system in fabrication;
Setting the machines;
Increase of the performances of the machines;
Staff formation and motivation; and,
Encouragement of the staff charged with the identification of the cost reduction
possibilities.

In order to achieve the continuous cost reduction objectives, kaizen budgeting must target the
entire organization, and this involves adequate management which must focus on the
following aspects:
Control of all the phases of the lifecycle of a product or service;
Making sure, in a progressive manner, that the new products will be profitable
throughout the entire duration of their life cycle (monitoring of the costs during this
cycle by comparing the estimates and the obtained results, with reference to the
selling price of the competition)
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.

Facilitating a Successful Kaizen Process

A refined approach to completing a Kaizen is the key to ensuring results. More importantly,
the approach needs to be facilitated by an individual who has good people skills, excellent
team work capabilities, quick conflict resolution skills and in-depth negotiating skills. This
type of leader, coupled with an empowered team, is best poised for success. We can all relate
to a project we were exposed to that did not quite reach its full potential, either because of the
lack of direction in the project management or the lack of experience in the project manager.
Kaizen can easily mitigate issues by using the above criteria for the facilitator while
following a rigorous application of a 10-step methodology.

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 Figure: Kaizen Costing Implementation Stages

The implementation of Kaizen involves everyone - managers and workers - and

requires a permanent commitment to the Kaizen principles. It is not meant to be
implemented as a process, but rather to be lived at all levels of an organization as a
philosophy. In order to achieve this, management must nevertheless master a set of
core elements and systems to realize the Kaizen strategy such as: plan-do-check-act
cycles (PDCA), process versus result, putting quality first, speak with data and the
principle that the next process is the customer (Imai, 1997). Implementation of particular
improvement projects usually passes three stages: identification of problems (matters for
improvement) by employees and formation of a habit to tackle them; conceptualization of
new ideas to improve the process; and formal submitting of improvement suggestions.
Further there are five principles that must be implemented for a successful application of the
Kaizen concept the so-called 5S. The term 5S comes from the five Japanese words that
translate as: selection, systemic, cleaning, standardisation and selfdiscipline (Karkoszka and
Honorowicz, 2009).

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Generally here three Steps to Successful Application:
Select a project, understand the current situation and set objectives.
Analyze data to identify the root causes of problems, or inefficiencies.
Establish and implement counter measures.

Kaizens Ten-Step Process

Your favorite process improvement methodology can be molded from Kaizens 10 steps,
including Six Sigma, Plan Do Check Act (PCDA), or even Select Clarify Organize Run
Evaluate (SCORE). This flexibility gives the Kaizen an ability to be used throughout your
organization by any experienced facilitator. These 10 steps are the process map through
which the event is kept on track and participants remain engaged. See the steps below to
compare the other methodologies to the Kaizen process.
Define the problem
Document the current situation
Visualize the ideal situation
Define measurement targets
Brainstorm solutions to the problem
Develop Kaizen plan
Implement plan
Measure, record and compare results to targets
Prepare summary documents
Create short term action plan, on-going standards and sustaining plan

Kaizen Costing Vs. Standard Costing System

According to Monden & Lee (1993) the effectiveness of standard costing system is to control
costs and it is being used for the last several decades and some authors compared standard
with kaizen costing to reduce costs. Monden (1995) explained differences between a standard
costing system and kaizen costing and differences between these two terms are shown in
following table.

Standard Costing Kaizen Costing

It is cost control system. It is a cost reduction system

Its goal is to maintain current Its goal is continuous improvement in

manufacturing condition only not manufacturing conditions or to reduce cost lower
change. than standard costs.

Assume to meet cost performance standards. Assume to achieve cost reduction targets

Cost variance analysis involving Cost variance analysis involving kaizen cost targets

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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 Its procedure sets new cost reduction targets each
standard costs are set for one or two month through continuous activities to attain target
times every year means annually or profits or to reduce the existing gap between the
semiannually. target and current costs.

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)

Kaizen Costing Vs. Activity Based Costing:

Feature ABC Kaizen Costing
Control location Within cost system Outside of cost system
Feedback time frame Long term Short term
Connection between Connection is made through Connection through cost accounting
cost system and cost accounting is not critical
strategic decisions
Primary focus on Fixed costs Variable costs
costs
Relate transactions Transactions are directly Transactions are not directly related
to cost accounting related to cost accounting to cost accounting
Use of cost drivers Use activity cost drivers and Use performance measures
and performance performance measures
measures
Nature of Comprehensive cost Tool for motivation and enforcement
methodology accounting and management
methodology

Potential Advantages

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 Kaizen, by encouraging the development of smaller, self-managing groups,
consolidates team-working, increases on-the-job training potential and leads to a
greater understanding of change and cooperation in the workplace (Brunet, 2000).
The employee suggestion system is an integral part of the Kaizen management
framework that helps to formally recognise employee efforts, offers workers a
worthwhile role in company development and ultimately improves involvement in
work (Imai, 1986).
Kaizen, as a lean thinking approach, involves identifying human activities that absorb
resources but add no value (muda, or waste, see Lean Production) ultimately
facilitating the correction of problems in the workplace and adding value (Womack
and Jones, 1996).

Besides the potential advantages given above, there are some other advantages:

1) It is process centered. It is thus able to identify exactly where things are going wrong
and change the processes so that mistakes do not occur. Wasteful processes are
reduced, and this in turn reduced waste of resources.

2) All people who participate in it get certain responsibilities, thereby giving them more
purposefulness. Further, since it puts people on the forefront, employee morale
increases tremendously.

3) There is reduced need for inspection since there is less scope for error.

4) Teamwork increases tremendously as a result of it and people are able to think beyond
the needs of their specific department.

5) Customer requirements are placed at the forefront of company efforts and all products
and services are geared to the needs of clients.

6) The long term and short term goals of the company are identified easily and there are
systems to ensure that these goals are achieved.

Even though the advantages of kaizen are numerous and widely acknowledged, it has to be
admitted that this style of managing a business has a few disadvantages as well. These
drawbacks can be quite serious if a company pays only lip service to this management
concept and implements it without really understanding why or how.

Potential Disadvantages
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 Kaizen signals a permanent change of management system. Once implemented it is
hard to return to previous management systems should the need or desire arise. Also,
since Kaizen is intertwined with Japanese culture, it may be difficult to apply in other
cultural contexts (Brunet, 2000).
Kaizen can increase the burden on lower level management as they not only have to
spend time on the shopfloor (the front line) facilitating the implementation of the
approach, but they may also have to work after hours to complete their routine
administration tasks (Brunet, 2000).
Kaizen can lead to diminishing returns. The continuous improvement approach leads
to a focus on smaller and smaller details with lower potential returns, without a
concurrent reduction in effort (Brunet, 2000).

Besides the potential disadvantages given above, there are some other disadvantages:

1) Some companies need to bring about an immense change in their mind set and style
of functioning. This is sometimes very difficult and the initial problems created can be
very bad for business overall. For instance, companies need to have a very open style
of communication in order to put this management style into practice. Also, many
employees think very territorially and are unwilling to let go 'their' work areas.

2) Very often, the initial excitement around using a new management style dies down all
too soon. As a result, companies are not able to get the results they are looking for.
Further, it makes people believe that this management technique will not work at all.

A good understanding of Kaizen will help you use it well to bring about great success in your
company. You'll be able to cut costs and increase productivity thanks to this management
style.

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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 Ellram, L. M. (2000). Purchasing and supply managements participation in the
target costing process. Journal of Supply Chain Management, Vol. 36, No. 2, pp. 39-
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Barnes, T. (1996). Kaizen strategies for successful leadership. London: Pitman.

Manmeet Kaur (2014). KAIZEN COSTING: A CATALYST FOR CHANGE AND

CONTINUOUS COST IMPROVEMENT. GE - International Journal of Management
Research, VOLUME 2, ISSUE 1.

Berliner, C., Modarress, B., Ansari, A., & Lockwood, D. (1988).Cost Management
for Todays Advanced Manufacturing.Boston, MA: Harvard Business School Press.

Budugan, D., & Georgescu, I. (2009). Cost reduction by using budgeting via the
Kaizen method. AnaleleStiintifice ale Universitatii AlexandruIoanCuza din
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Pius Okoye, Francis Egbunike & Olamide Meduoye (2013). Product Cost
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www.scribd.com

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