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Kaizen Costing

INTRODUCTION:

Kaizen costing is a technique of controlling the cost incurred over unproductive activities and
resources which does not add any value to the organization. In simple words, it is a practical
approach to solving cost-related problems to improve the overall efficiency of the
organization. Kaizen costing is implemented in business organizations to manage different
types of costs in a business:

The cost of the supply chain, including administration, order procurement, inventory and

transportation costs can be controlled through kaizen costing. It regulates all the cost incurred
in the production of goods or services, including the cost of machinery, tools, labour, raw
material and other equipment.

Cost of acquiring a patent, license, registration fees, hiring of chartered accountant and all
other legal formalities require kaizen costing. At the same time, it is also applicable at the
time of redesigning of any product which involves cost on research, analysis, hiring of expert
personnel, etc.

Human resource is another essential arena which is covered by this technique. It functions to
manage the cost of hiring skilled employees, their training and development and retention.

With the help of kaizen costing, the wastage of raw material and time of the labour can be
controlled by improving the business operations. The organization also incurs cost
on disposal of the waste or defective products. Kaizen costing provides a solution through
reusability of the waste and improving the production efficiency to reduce the manufacturing
of faulty products.

Thus, we can say that the cost of product promotion, advertisement, dispatch, selling and
distribution, transportation, recruitment of marketing staff, etc. can all be monitored through
kaizen costing.

Importance of Kaizen Costing

Less waste: Whenever we want to improve things. We start with removing the waste
thereby optimizing the process. Waste can be the wastage of resource or manpower.
 Productivity: With the reduction of waste, productivity increase positively.

Quality: With improvement in mind managers always strive for the optimum quality. Kaizen
helps improve the quality of products and processes.

Result orientation: Kaizen is a process which is result oriented. There is clear

demarcation of where the organizations operating and where it wants to reach.

Accuracy: Due to the focus on getting results productively and with high quality, process is
found which are effective and accurate.

Cost advantage: With everything working on high efficiency and productivity, there
is a huge cost advantage to the firm because it gets more output with lesser input.

Competitive advantage: Organisation following Kaizen gain a competitive advantage

because they are continuously improving and they might take newer competitors as
benchmarks learn new things and take their competitor down.

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(sort)
 Seiton(straighten)
 Seiso(shine)
 Seiketsu(standardize)
 Shitsuke(sustain)

Seiri(Sort)

 Makes work easier by eliminating obstacles and evaluate necessary items with regard
to cost or other factors.
 Reduces chances of being disturbed with unnecessary items.
 Prevent accumulation of unnecessary items.

Seiton(Straighten)

 Arrange all necessary items into their most efficient and accessible arrangements so
that they can be easily selected for use and make workflow smooth and easy.
 Ensure first-in-first-out(FIFO)basis, so that it is easy to find and pickup necessary
items.
 Place components according to their uses, with the frequently used components being
neared to the work.
Seiso(Shine)

 Clean your workplace on daily basis completely or set cleaning frequency.

 Keep workplace safe, easy to work, clean and pleasing to work in.
 In an unfamiliar environment, people must be able to detect any problems within 50
feet.

Seiketsu(Standardize)

 Standardize the best practices in the work area.

 Maintain high standards, orderliness, everything in order and according to its
standard.
 Every process has a standard.

Shitsuke(Sustain)

 Not harmful to anyone, training and discipline, to maintain proper order.

 Also translates as do without being told.
 Training is goal-oriented process. Its resulting feedback is necessary on monthly
basis.

Kaizen Costing Process

Involve your employees: The involvement of employees plays an important role in

implementing any change. The participation of employees and their feedback helps in
generating ideas and information.

Find problem: The organization with its employee of all departments need to find out
problems in the organization.

Find solution: The next step is solving the identified problem; This step needs a lot
of brainstorming approach manager from a team to find out a practical solution of each
question.

Implement: Implementing any change involves cost and risk simultaneously. The new idea
must be testified on a small part of the organization.

Check: The managers need to look after the proper implementation of the kaizen
costing.

Standardize: After being satisfied with the results, the organization need to set this
change as a standard procedure for all the departments and across the whole organization.
 Repeat: A standardized procedure becomes the organizational culture when
continuously practiced over a period.

KAIZEN IMPLEMENTATION TOOLS:

Pareto chart: This chart is a very useful tool when it is necessary to separate the important
factors from the insignificant factors. Pareto chart helps to establish priorities with regard to
the use of resources. Vilfredo Pareto recognized that in the real world, a minority of causes
led to majority of problems. Resources need to be applied when they are needed most. The
purpose of Pareto chart is to show where to apply resources by revealing the significant few
from the significant many.

Flow chart: This chart shows the sequence of the processes and the amount of time required
for each process. It is a graphic device presenting the way a process actually works. The flow
chart helps to pinpoint problematic aspect of a process and identifies areas where
improvements can be made.

Check sheet: Check sheet is a valuable tool that helps to generate useful information from a
wide variety of displayed data. This sheet helps in differentiating relevant and irrelevant data.
It is an important tool for conveying data into easy to use information. It generates rich
information for continuous improvements in process and can be applied to any work
environment.

Stratification: This involves investigating the cause of a problem by grouping into suitable
categories. This grouping of data is called stratification. Grouping of data by common
characteristics makes it easier to understand the data and pill insights from it. These groups
might include data relative to the people involved, machines, and materials used in the
process.

Run chart: This chart is used to track performance of everything happening in a process
overtime. It is an ideal chart to show the improvements in the process as a result of efforts
put in. This chart fails to depict whether the variation is the result of special causes or
common causes.
Disadvantage of Kaizen Costing

Burden on lower level management : It becomes confusing for the bottom level
management to adopt the change in process.

Training requirement: Kaizen methodology requires training staff and management

to understand and adopt kaizen costing.

Change is difficult: The greatest kaizen disadvantage is that people are always reluctant to
change. Employees might not be ready to accept a different system from what they have
been used to. On the other hand, management might be reluctant to implement
kaizen because they feel it is expensive.

Companies that are Using Kaizen Costing

Many companies successfully use kaizen to inspire continuous improvement around
the facility. Kaizen helps companies around the world to cut down on wastes. The most
famous kaizen company that first implemented its practices is Toyota. Toyota has been
using the kaizen philosophy for decades now and kaizen can be seen being practiced on
many different levels within the organization. Kaizen is at the foundation of the Toyota
production system, which is the heart of Toyota’s processes. Another companies that use
kaizen are the Ford Motor, Reliance industries, Asian paints, Bharat Heavy Electrical
Limited, Godrej Consumer Products Limited, India oil corporation, Nestle, Unilever,
Cadbury etc.

KAIZEN COSTING TARGETS

 In order to achieve cost reduction, variable as well as fixed costs are considered.
However, since fixed costs are needed to maintain continuous growth, Kaizen cost is
achieved mainly by reduction in the variable costs, direct material and direct labour
costs. In non-manufacturing departments, reduction is achieved through fixed cost
items. Targets for kaizen costs are set monthly based on following procedure:
 Per product actual cost in the previous year = Total actual cost of last year ÷ Actual
production in last year
 Estimated amount of total current year actual cost = Per product actual cost in the
previous year x Estimated production for the current year
  Kaizen cost target for the current year = Estimated amount of total current year actual
cost x Ratio of cost reduction target
 Assignment cost to each plant (assignment ratio)= Cost directly controlled in single
plant ÷ cost directly controlled in all plants
 Kaizen cost target for each plant = Kaizen cost target for the current year x
Assignment ratio

Conclusion
Above study shows the process, advantage and disadvantage of kaizen costing. We can say
that kaizen costing may be difficult to implement but it is not impossible. A new business
can implement kaizen costing easier than those with already established management
system. Kaizen costing in beneficial to a business, it is also beneficial to employee and
customer as well. We can say that when business have a good understanding of kaizen
costing’s advantage and disadvantages, they can use them for their own benefit.