Kaizen Costing: Definition and How Does It Work?

Kaizen Costing

In the contemporary business world, continuous improvement is very crucial. Continuous improvement empowers every department, individual, and organization for the better.

Kaizen is a Japanese term that means ‘change for the better or ‘continuous improvement.’ It is a business philosophy dating back to World War II.

Makai Imai was a Japanese researcher and management consultant. He is the name behind the concept of Kaizen. Toyota first applied kaizen in the 1950s after World War II had ended.

The Kaizen approach signifies the set of activities to continuously improve employee behaviors, management processes, and manufacturing processes. In other words, it focuses on improving every area of business management.

There are many improvement methods and models that come under the umbrella of Kaizen. The most famous ones are the Kanban system, just-in-time, zero defects, total quality management, etc.

This article will understand the concept of Kaizen costing and how it helps organizations improve their cost structures and overall cost of production.

What is Kaizen Costing?

Kaizen is a combination of Kai for change and Zen for good.

Kaizen costing can be defined as,

It is a cost reduction practice also known as continuous improvement costing. The companies aim to reduce product manufacturing costs without compromising standards, safety, and quality of products.

Kaizen costing is mostly used after the product’s design has been finalized and gone under production.

The most common techniques used under Kaizen costing include taking quotes from multiple suppliers to get the best price. It also includes implementing product redesigns and reduction of production wastes.

All the efforts of Kaizen costing are aimed at reducing the cost of production. Consequently, the company can offer a competitive yet economical price for the product.

Types of Costs

Numerous costs are incurred from idea generation to implementation and after-sale of the product. The most common costs that are focused on the reduction in Kaizen costing are:

  • Reducing the costs along the supply chain by collaborating with different suppliers
  • Redesigning the product for more cost optimization
  • Reducing the production of wastes
  • Legal costs for patent, trademark, and other formalities
  • Manufacturing costs are aimed to be reduced by economies of scale
  •  Recruitment and training costs by choosing more effective recruitment methods
  • Marketing, sales, and distribution costs
  • Disposal cost of the product
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Principles of Kaizen Costing

The principles of Kaizen costing are the same as the Kaizen management. Kaizen costing works on the following principles:

  • The first principle is the continuous improvement of everything. The principle signifies that there is always a margin of improvement.
  • Kaizen costing focuses on using the contemporary approaches than the old traditional approaches that have become obsolete in this age.
  • Everyone should be part of the work irrespective of the managerial level or authority level. Collective decision-making is encouraged.
  • There is no concept of sudden perfection. Everything can be given the best shape with gradual improvements.
  • There is no limit to improving yourself, and improvements can be made at any time and to any level.
  • Kaizen costing focuses on reducing the costs by reduction of waste. It signifies economies of scale and savings by little improvements.
  • Whenever and whatever require correction, it can be and should be corrected.
  • Everyone should be empowered to give their input and participate in collective problem-solving.

Types Of Costs Focused On Kaizen

Kaizen costing is not specific to the product manufacturing or service provision. Any organization can apply the Kaizen costing principles to the mass level, a particular operation, or product manufacturing. The costs focused during the Kaizen costing can be categorized as:

Asset Specific

In asset-specific Kaizen costing, the Kaizen principles improve the activities and practices related to the cost reduction for a specific asset or resource.

Product Specific

A company might have one product, two, or multiple product lines. The product-specific Kaizen costing focuses on the multiple activities related to one product, or it can be about the complete product line.

Most commonly, different activities and related costs of a product are improved for an optimized cost of production.

5S Of Kaizen Costing

5S of the Kaizen management is also applied to the Kaizen costing. The 5S Kaizen approach has the following S:

  • Seiri
  • Seiton
  • Seiso
  • Seiketsu
  • Shitsuke
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Here is an explanation of each S:

Seiri(Sort)

The items’ sorting and categorization is the first step in the 5S approach. The unnecessary items based on sorting are to be eliminated. Other prioritized items will be focused on in the next steps.

Seiton(Straighten)

The second S is Seiton which means to straighten. After eliminating obsolete items, the company has to organize its operations or items in a lean order. This step aims to increase the simplicity, visibility, and accessibility of every tool, operation, etc.

Seiso(Shine)

Seiso or shine aims at the cleanliness of all the processes. It focuses on reducing the clutter and ambiguities about the strategies to be implemented.

For the product costing, shine means to make the process of cost reduction more understandable and clear to everyone.

Seiketsu(Standardize)

Then comes Seiketsu, the most significant part of the Kaizen costing. At this stage, the devised strategies, tools, and methods will be standardized for future use.

Shitsuke(Sustain)

Finally, the concerned departments will be intimidated by the changes in the product costing. The main goal of Shitsuke is to inform everyone without creating an overwhelming situation. It instead aims to make everyone feel included in the decision been made.

How Does It Work?

After going through the Kaizen principles, 5S and concept, let’s go through the process of Kaizen in any business organization for cost reduction.

The process is more like the translation of 5S. However, it will be something as follow:

Taking Input Of All Employees

Inclusion of all employees from different hierarchical levels is the principle of Kaizen. Therefore, the first toward the Kaizen costing is the inclusion of all the employees.

The Kaizen costing team can save time and have more productive ideas about the product. Additionally, the inclusion of all employees reduces the employee’s resistance to a very minimal level.

Identifying The Problem

Employees from different departments and hierarchical levels are present. Be it finance, marketing, product design, human resource, customer service support, production, etc. The process will be more smooth.

 Every department can give their input about the problem like 360-degree feedback.  By doing so, the team has everything they need to know before finding a sustainable and comprehensive solution.

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Finding The Solution

Again, the solution finding is also a collective effort of everybody on board. Everyone is welcome to think of a possible solution and give their input on it.

The managers encourage the employees to think of the best solutions. Afterward, the best solution is agreed upon with consensus.

Implementing the Strategies

After completing the table talk, it’s time to implement the solution practically. It can be subject to various risks, cost factors, etc.

Therefore, before implementing an idea on a mass level, pilot testing is done. Pilot testing is done to testify the idea on a small sample.

Check The Results

Result checking is done once the Kaizen costing solution has been implemented on a small section. This step aims at assessing the effectiveness of the solution. It answers the questions like,

Did the idea work?

Is there any gap?

What improvements can be made?

Standardization

If the idea has been successful with satisfactory results, the strategy has to be standardized for company-wide implementation. Standard procedures are developed to replace the old procedures.

Repeat

The last step is to sustain the change and repeat the improvement process. As the basic principle of Kaizen is continuous improvement.

Therefore, the newly developed procedures are implemented. Afterward, they are regularly monitored for a room for improvement.

Standard Costing Vs. Kaizen Costing

Most businesses use the standard costing approach after a financial period. The variances of the actual costs from expected costs are measured and used for improving costs in the future period.

Here are the most differentiating features of the two cost reduction approaches.

Kaizen CostingStandard Costing
Kaizen costing is a continuous improvement method. Therefore, the cost reduction strategies and targets are evaluated every month.A standard costing approach is an annual approach. The cost standards are set at the start of every financial year. In some cases, targets might be placed on a semi-annual basis.
The variance analysis compares actual cost reductions and the target Kaizen cost reductions.The expected standard costs are compared with the actual costs for variance analysis.
The investigation practices are implemented when the target Kaizen cost reductions are not achieved.When the standards are not met, investigative practices are implemented to identify the gaps.

Conclusion

Kaizen is a holistic approach developed by Japanese businesses, and it was brought to America and Europe after World War II. It is the most used approach in any business operation around the world.

In this article, we have tried to comprehend the base of Kaizen costing, its implications, principles, and comparison with other costing approaches.