Kaizen cost is a continuous improvement system that aims to reduce costs through gradual changes in the manufacturing process. It involves analyzing all parts of the process and generating ideas to improve efficiency and reduce waste. Employees are treated as valuable sources of solutions.
Kaizen cost is a cost reduction system applied to a product in production. It comes from the combination of the Japanese characters ‘kai’ and ‘zen’, which mean ‘change’ and ‘good’ respectively. The word ‘Kaizen’ translates to ‘continuous improvement’ or ‘change for the better’ and aims to improve productivity by making gradual changes throughout the entire manufacturing process. Some of the cost reduction strategies employed involve producing cheaper redesigns, eliminating waste and reducing process costs. Ensuring quality control, using more efficient equipment, utilizing new technological advances, and standardizing work are additional elements.
To understand Kaizen costing, one must first understand the standard costing methodology. The typical standard costing approach works by first designing a product and computing the costs, taking into account material, labor, and overhead costs. The resulting value is defined as the cost of the product. Standard cost is set and reviewed annually. Cost variance analysis involves checking to see if the projected cost is in line with the final values. Manufacturing procedures are assumed to be static.
On the other hand, Kaizen cost is based on continuous improvement of the manufacturing process, with changes being implemented throughout the year. Cost reduction targets are defined monthly. The objective here is to reduce the gap between profit estimates and target profits. The cost variance analysis done in Kaizen costing examines the difference between Kaizen target costs and the actual cost reduction achieved. The basic idea here is to make small, incremental cost reductions over and over the lifecycle of a product.
As the goal is to reduce costs on a monthly basis, all departments in the company strive to introduce operational changes on a daily basis. The Kaizen approach requires analyzing all parts of the process and generating ideas on how they can be improved. The cost of Kaizen takes into account aspects such as time-saving strategies, employee efficiency and waste reduction by incorporating better equipment and materials.
The fundamental foundation of the Kaizen approach revolves around recognizing that employees working on a particular job are aware of how that particular task can be greatly improved. They are then enabled to do so under the Kaizen costing system. Employees are treated as valuable sources of viable solutions, an approach that differs greatly from the standard costing system that sees employees as workers with varying levels of performance.
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