What is Kaizen costing? Kaizen is a Japanese term that means continuous improvement. Kaizen events can be defined as making improvements through a process that emphasize small incremental amounts rather than large or radical improvement. Therefore in order to achieve this kaizen costing not include only continuous cost reduction but also continuous improvement of performance by increase the efficiency throughout the process. Why we need Kaizen costing?Market prices of a product tend to decrease over the product life cycles, due to this reason in order to maintain a desired level of profit margin Kaizen costing occur.
What is the purpose of Kaizen costing? The purpose of Kaizen costing is to achieving cost reduction in a production of product through increase in efficiency of the process. In a more specific scope, the aim of kaizen costing is to reduce the unit manufacturing costs of particular products and if possible taking it below previous period unit cost. When Kaizen costing being applied?It is applied during manufacturing or production stage of a product life cycle.
Even though the scope to reduce costs is limited at this stage, significant reduction in cost can still be made through continual efforts. Who are involved in Kaizen costing? Continuous improvement is a responsibility and goal for every worker, starting from the CEO to the common workers, in every activity, every day and all time. The workers are encouraged to identify ways of how to reducing costs through their ‘hands on’ experience.It means that Kaizen costing involved in all aspects and every level of a company performance. How to apply Kaizen costing? To achieve continuous cost reduction implied in Kaizen costing, kaizen goal need to be established. Companies could establish annual or monthly target cost reduction rates in order to motivate the workers as they know what are they achieving at.
Companies can adjust target rates and amounts for changes based on manufacturing condition such as changes in input factors, increase in labour rates and other.As in figure 1, we could see from the Kaizen costing chart, the cost base (a) or reference point is the actual cost in prior year.
This actual cost becomes the base line for setting the new Kaizen goal in the current year. The actual reduction throughout current year (b) is then being compared with the Kaizen goal (c) to evaluate the performance of the Kaizen event in the current year. At the end of the year, the same process involve which is the current actual cost become the base line for the next year Kaizen goal and this cost reduction continues.