Kaizen Costing

Definition: Kaizen is a Japanese term which means “continuous improvement” on which Lean Manufacturing System is based. It refers to the continuous improvement and examination program constantly going on in the organization that stresses on the effective waste management, during the manufacturing process, as a result of which costs is further reduced below the initial standards stipulated at the time of designing the product.

In this technique, incremental improvements are made to the product undergoing production process, continuous reduction in production cost and constant improvement in designing and developing the product.

In finer terms, the Kaizen Costing is the sustenance of existing cost levels for the products under the manufacturing process by way of collective efforts to attain the intended cost level.

Kaizen Costing aims at eliminating wastes and losses in the process of production, assembly and distribution, along with removing the unnecessary steps during these processes and implementing economic re-designs for the product. Thus, it reduces extra costs at each stage.

Kaizen Costing Principles

• Continuous improvements in the present situation, at an agreeable cost.
• No limits to the improvement level that has to be implemented.
• Advocates collective decision making and knowledge application.
• Concentrates on waste or loss elimination, system and productivity improvement.
• Establishing standards and then continually working on improving them.
• Participating all employees and covering every business area, i.e. all the levels, departments and units.

The primary assumption behind Kaizen Costing is that nothing is perfect, so there is always a room for improvements and reductions in the variable costs. So, slight, additional changes are regularly applied and maintained during the production stage of the product life cycle, over a long period, leading to substantial improvements.

Types of Kaizen Costing

• Asset-Oriented or Organization-oriented: Kaizen costing activities are planned and directed as per the requirement of the firm or deal.
• Product-Oriented: Kaizen costing activities are undertaken in specialised projects with great focus on value analysis.

Kaizen Costing is laid out to redo many value engineering steps until the production of the product continues and constantly working on upgrading the process and thus eliminating the extra costs. However, the cost reduction arising from Kaizen costing is quite less than those attained with value engineering.

Nevertheless, Kaizen Costing is still essential for the organization as competitive pressures will force the firms to reduce the price of the product over time and any possible savings in the costs facilitate in achieving the intended profit margins while continually working on reducing cost.

Hence, in Kaizen Costing method ensures production of a product while meeting the desired quality, usability, customer satisfaction and reasonable price, to maintain its competitiveness.