Kaizen Costing

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Kaizen Costing is a Japanese cost management concept developed by Yasuhiro Monden .

Role in the product life cycle

Kaizen costing is the continuation of target costing . According to the Japanese understanding, target costing and kaizen costing form a unit ( total life cycle costing ). While target costing concentrates on reaching a predetermined low cost level at the start of production, kaizen costing aims to achieve a continuous lowering of the cost level (specified by target costing) even after production has started. This corresponds to the idea of ​​continuous improvement that emerged from Kaizen, so that in the course of the production of a product, due to increasing experience, the manufacturing processes can be designed better and more efficiently.

aims

  • Continuous cost reduction in every phase of the manufacturing process
  • This reduces any gaps between target profits (budgeted profits) and projected profits
  • Reduction of manufacturing costs below the level of standard costs
  • Motivate employees to undertake cost reduction activities by setting cost reduction targets

Historical background

The concept is based on the Japanese management concept Kaizen, founded by Taiichi Ohno . Kaizen Costing was developed in the course of many years of research by Yasuhio Monden in cooperation with various Japanese automobile manufacturers and suppliers.

Fundamentals of Kaizen Costing

Kaizen Costing connects seamlessly to Target Costing. A predefined cost structure is adopted from this at the start of production. This cost base forms the basis for the success of the product. However, this is only valid for a certain period of time as prices change over time. So that the targeted profit margin can be kept with steadily falling prices, the costs must also be reduced. The extent of the necessary cost reduction is derived accordingly from the short-term profit plan.
Kaizen Costing is carried out in the following three steps, which correspond to the principle of the Deming circle (PDCA cycle).

planning

First, target cost reduction amounts are determined. This starts with the calculation of the company's target profit increase during budgeting. The target cost reduction amount is defined as the difference between the target profit (planned profit) and the expected profit (forecast).
In order to achieve this profit increase target, the cost reduction target must be set as part of the Kaizen Costing. This value must be taken into account in the budgets for the next period. The target cost reduction amount is then distributed to individual production sites and expressed there as kaizen costing target values ​​for certain processes.
The specified target cost reduction amounts are intended to help motivate employees to undertake improvement activities and thus achieve the company's planned operating profit.

execution

To achieve the kaizen costing target values, so-called kaizen costing activities are carried out during the manufacturing process. Yasuhiro Moons differentiates between two types of Kaizen Costing activities:

  • Activities emanating from the company's accounting
  • Kaizen activities in the workplace

The latter concern, for example, the avoidance of waste. You can read more about this in the article on Kaizen .

control

The control of the Kaizen Costing System is carried out, as is the case with conventional cost management systems, with the help of deviation analyzes . This makes it possible to distinguish between the assessment of the performance of departments, for example by determining deviations due to the degree of employment, for budgets and for other aspects that result from design changes based on value analyzes.

Criticism of Kaizen Costing

  • The system puts enormous pressure on employees to reduce every conceivable cost factor.
    • For this reason, some Japanese automobile manufacturers grant a grace period before a new vehicle model is introduced.
    • In this phase of cost maintenance, employees can familiarize themselves with the changed processes before the company again stipulates kaizen costing targets.
  • Kaizen Costing only leads to small, incremental improvements instead of innovations.
    • This can lead to myopia as management focuses on details rather than the overall system.
    • In practice, a high level of effort in data acquisition is offset by a relatively low benefit.

See also

literature

  • R. Howell, M. Sakurai: Management Accounting and Other Lessons from the Japanese. In: Management Accounting. December 1992, pp. 28-34.
  • P. Horvath, W. Seidenschwarz, H. Sommerfeldt: From Genka Kikadu to Kaizen. How Japanese companies keep their costs under control. In: Controlling. Volume 1, 1993, pp. 10-18.
  • Y. Moons: Ways to Reduce Costs. Target Costing and Kaizen Costing. Verlag Franz Vahlen, Munich 1999, ISBN 3-8006-2142-8 .
  • T. Reich: Process improvement through cost information. Japanese, American and European cost management in comparison. (= Modern Business Administration. Volume 11). Linde Verlag, Vienna 1995, ISBN 3-85122-462-0 .