Kaizen Costing and Kaizen Cost Management

                                        Narayana Rao K.V.S.S. on Cover Page of Business Today 

October 22 – November 6, 1997

Prof. Yasuhiro Monden and Prof. Kazuki Hamada explained  the key points in Toyota’s  Cost Management System in  book entitled “Toyota Management System: Linking the Seven Key Functional Areas”.

In the text of the book the authors talk about the basics of Target Costing (Toyota calls it Genka Kikaku) and Kaizen Costing (Genka Kaizen). Toyota puts a lot of work into  planning the cost and monitoring  actual costs associated with a vehicle. Just as industrial engineers watch  every second  on the shop floor to identify waste, every dollar in a component is analyzed for improvement in vehicles as well. Accounting and measurement alone will not produce results.  Measurement is just a piece of the improvement process  just as “Check” is only a part of the Plan-Do-Check-Action cycle for improvement. A critical piece of Toyota’s strength in terms of financial results lies in the realm of the overall cost planning process and the structured VA, VE, & VI activities that occur during the life cycle of the program.

Kaizen costing is variant of standard costing. Standard costing specifies a cost target for the production team for the coming period. Normally standard cost is set for an year. It will be revised every year. It is constant for an year as a planning device. Any variances from it are examined and the reasons are identified and understood.

Kaizen costing is cost planning that incorporates kaizen philosophy or philosophy of continuous improvement and implementation of the principles of learning effect.

According to learning effect principle, the average cost of an item is certain percentage of average cost of earlier volume. It is expressed  as  volume of production and sales doubles(X becomes 2X), the average cost of total sales (2X) is say, 90% of the average cost of producing and selling X units. There is a learning effect in every activity undertaken by the organization right from the lowest cadre employee to the CEO and Board and cost comes down.

Japanese implemented this cost reduction philosophy in a systematic manner. They made planned reductions in the standard costs of an item every year. So the production and sales team have to plan their department and activity cost to achieve reduction in standard cost. The idea was extended by them to monthly costs. They said we cannot achieve cost reduction in one day. So having a standard cost for an year and then asking for reduction in it next year is not the right approach for cost reduction. They came with a reducing cost target for every month. Such a reducing cost target for every month demands some effort on cost reduction by departments every month. Hence cost reduction is on the monthly agenda of every department in the company. Kaizen costing is providing the monthly cost target information and accounting for actuals durng the month.

For More Detailed Reading

Kaizen Costing and Value Analysis

Control Measures for Kaizen Costing – Formulation and Practical Use of the Half-Life Model

Introduction to Kaizen Budgeting

 B. Modarress;  A. Ansari; D. L. Lockwood,  “Kaizen costing for lean manufacturing: a case study” International Journal of Production Research, Volume 43, Issue 9 May 2005 , pages 1751 – 1760.

Included in Knol Handbook of Industrial Engineering – 2019

Index of articles on Cost Accounting, Costing and Cost Management


Originally published on Knol
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Updated on 8 May 2019, 27 January 2012