The study aims to determine the costs first with the kaizen costing method in a manufacturing company

producing plywood and then reduce the costs to reach the targeted profit. In line with the analysis of
the 2020 budget of the enterprise and the targeted profit rates for 2021, how much cost should be
reduced with the kaizen costing method was calculated. Then, it was determined at which levels and in
which departments this cost reduction should be. It is thought that this study is important in terms of
being an exemplary application in providing cost efficiency with the kaizen costing method, which will
help a manufacturing company to be more competitive.

Operating in the woodworking industry, this business is in an industry with intense competition. As a
result of the interviews with the business managers and the factory visits, it was decided to implement
the kaizen costing study in this business, as it was seen that it was appropriate. The study was carried
out in a company that produces plywood in the manufacturing industry in Ordu. The enterprise has a
total of 30,000 m2 of central production area and two branches of 20,000 m2 and 15,000 m2 closed
areas. There are 323 personnel and 46 machines in total in the enterprise. There are four main
production areas in the enterprise where the application is made. These; peeling, drying, pressing, and
storage. The production stages of the plywood product are as follows: First, the logs are peeled from the
peeling machine and dried in the dryer. Then it is passed to the glueing section and glued in layers.
Afterward, the product goes to the pressing area and is compressed at specific rates, and becomes
plywood. Finally, it is transported and stored.

The sales and production costs of the plywood producing enterprise for the year 2020 are as in Table 1

Table 1: Sales and Costs (2020)

Actual Selling Price per m^3 2.800 TL

Actual Cost per m^3 2.565 TL
Amount of Product Produced 43.826 m^3
Sales Revenue 122.712.800 TL
Cost of Produced Goods 112.413.690 TL
Peeling Cost 56.206.845 TL
Drying Cost 33.724.107 TL
Pressing Cost 16.862.053,50 TL
Storage Cost 5.620.684,50 TL

The estimated budget expectation of the enterprise for 2021 is as in Table 2. Due to the extreme
fluctuations in the general level of prices, the effect of inflation on costs has not been considered.

Table 2: Estimated Budget Data for 2021

Target Sales Price per m^3 2.900TL

Estimated Product Quantity 50.000 m^3
Target Profit Margin 13%

According to Table 1 and Table 2, the actual sales price of one m3 of plywood produced in 2020 is
2.800.00 TL, and the cost of one m3 is 2.565.00 TL. A total of 43,826 m3 of plywood was produced in
2020, resulting in a total sales revenue of 122,712,800,00 TL. The total cost of the manufactured product
in 2020 is 112,413,690,00 TL. In the same year, the total costs in the production units were as follows.
The total cost of the peeling unit is 56,206,845.00 TL, the total cost of the drying unit is 33,724,107.00
TL, and the total cost of the pressing unit is 16,862,053.50 TL, and the total cost of the storage unit is
5,620,684.50 TL. In the estimated budget data for 2021, the target sales price of one m3 of plywood is
estimated as 2,900.00 TL, and it is planned to produce a total of 50.000 m3 of plywood. The target profit
rate for 2021 is estimated at 13%.

Kaizen costing process for the enterprise takes place in six plans.

Production Distribution and Sales Plan (Which includes projections of contribution margins from sales)

At this stage, calculations of the profit contribution margin are made according to the sales of the
enterprise. Accordingly, the profit of the manufacturing enterprise, which was first applied, for 2020 is
calculated as follows.

Previous Period Profit (2020) = Actual Amount of Produced Goods x (Actual Selling Price – Actual Cost)

Previous Period Profit = 43.826 m3

x (2.800 TL/m3 – 2.565 TL/m3)

Previous Period Profit= 10.299.110 TL

After calculating the profit for 2020, the profit forecast calculations for the next year (2021) are as
follows: Following Period Profit (2021) = Estimated Amount of Goods Produced x (Target Sales Price x
Target Profit Margin)

Estimated Profit of Following Period (2021) = 50.000 m3 x (2.900 TL/m3 x 0,13)

Estimated Profit of Following Period = 18.850.000 TL

At this stage, to reach the estimated profit in the following period, the amount of profit that needs to be
obtained with the kaizen costing method is as follows:

Additional Profit = Profit of Following Period (2021) – Profit of Previous Period (2020)

Additional Profit = 18.850.000 TL – 10.299.110 TL = 8.550.890 TL

Projected parts and Material Costs

The main raw material of the manufacturing enterprise producing plywood is poplar-beech logs. It is
estimated that the price of logs will be 2.000 TL per unit for 2021. According to the 50,000 m3 sales
estimation of the enterprise, the total cost of the main products in 2021 is estimated to be = 50,000 m3
x 2,000 TL/m3=100,000,000 TL.

Plant Rationalization Plan

At this stage, variable costs in production will be calculated and cost reductions will be planned. In this
context, the first calculation of the total cost for 2021 is as follows:

Total Estimated Cost (2021) = Actual Unit Cost (2020) x Estimated Amount of Goods Produced (2021)

Total Estimated Cost = 2.565 TL/m3 x 50.000 m3

Total Estimated Cost = 128.250.000 TL

In addition, the unit target cost for 2021 is calculated as follows.

Target Cost per Unit (2021) = Target Sales Price (2021) – (Target Sales Price x Target Profit Margin)

Unit Target Cost = 2.900.00 TL/m3 – (2.900.00 TL/m3 x 0.13)

Unit Target Cost = 2.523.00 TL/m3

Thus, the total target cost for 2021 was calculated as follows.

Total Target Cost (2021) = Unit Target Cost (2021) x Estimated Amount of Goods Produced (2021)

Total Target Cost =2.523 TL/m3 x 50.000 m3

Total Target Cost = 126,150,000 TL

To reach the targeted profit, it is necessary to reach the targeted cost. The difference between the total
estimated cost for 2021 and the total target cost for 2021 shows the amount required for the amount of
reduction in variable costs in production. According to this:

Amount of Reduction in Variable Costs in Production = Total Estimated Cost – Total Target Cost

Variable Cost Reduction Amount in Production = 128.250.000 TL – 126.150.000 TL

Variable Cost Reduction Amount in Production = 2,100,000 TL

Accordingly, if the business wants to reach the targeted profit rate, it should reduce the variable costs by
TL 2,100,000. Thus, it will be able to reach its targeted 13% profitability by selling 50,000 m3 of product
at a unit price of 2,900 TL/m3, which is the target sales price for 2021.

Personnel Plan

The enterprise is planned to work with 350 workers in 2021. The distribution of the employees
according to the production expense centers is as in Table 3:

Table 3: Personnel Planning for 2021

Production Unit Planned Number of Employees

Peeling 175
Drying 105
Pressing 53
Storage 17
Total 350

In 2021, it is planned to employ 175 employees in the peeling unit, 105 employees in the drying unit,
53employees in the pressing unit, and 17 employees in the storage unit. The average wages that the
business will pay to these employees for 2021 are shown in Table 4.
 Table 4. Distribution of Average Direct workforce Wages in 2021

Main Production Cost Centers Number of Employees Annual Total Average Wage
Peeling 175 7.560.000
Drying 105 4.536.000
Pressing 53 2.289.600
Storage 17 734.400
Total 350 15.120.000

The workers working in the main production cost centers in Table 4 are direct workers, and the cost to
the employer for each worker has been determined as approximately 3,600 TL with government
incentives. Accordingly, the annual total average wage was calculated as (number of workers x 3.600 TL
x 12 months). The annual average wage was calculated as 15.120.000 TL, with a total of 7.560.000 TL in
the peeling, 4.536.000 TL in the drying, 2.289.600 TL in the pressing, and 734.400 TL in the storage unit.

Facility Investment Plan (Capital budget and Depreciation)

At this planning stage, capital budgeting and depreciation calculations for the facility investment are
made. The number of currently 46 machines in the plywood mill is planned to be increased to 53 by
2021. Accordingly, the total value of fixed assets is approximately 3,000,000 TL, with an estimated
annual depreciation of 600,000 TL. The time value of money has not been considered and amounts of
depreciation have been received directly from management.

Fixed Expense Plan

At this planning stage, fixed expenditure costs such as project costs, maintenance-repair costs,
advertising promotion costs, and general administrative expenses are determined. For the year 2021,
estimated annual maintenance-repair expenses of 400.000 TL for the machines and approximately
4.000.000 TL as general administrative expenses are planned.

Setting Kaizen Cost Targets

1. Actual Cost Per Unit in Previous Year= total actual cost previous year/the amount of production
realized the previous year

Actual Cost Per Unit in Previous Year = 112,413,690 TL / 43.826 m3 = 2,565 TL/m3

2. Current Year Total Estimated Cost = Actual Cost Per Unit in Previous Year (1) x Current Year Estimated
Production Amount

Total Estimated Cost (2021) = 2,565 TL/m3 x 50,000 m3 = 128,250,000 TL

3. Current Year Kaizen Cost Target = Current Year Total Estimated Cost (2) x Cost Reduction Target Rate

According to the calculations specified in the Stage 3 facility rationalization plan;

Variable Cost Reduction in Production = Total Estimated Cost – Total Target Cost

Variable Cost Reduction Amount in Production = 128.250.000 TL – 126.150.000 TL

Variable Cost Reduction Amount in Production= 2.100.000 TL

4. Allocation ratio = Costs directly controlled by one unit/costs directly controlled by all units

There are 4 main production cost centers in the plywood business, namely Peeling, Drying, Pressing and
Storage. Activity centers also consist of activities carried out in these cost centers. The production cost
of these activities in 2020 is shown in Table 5 below.

Table 5: Cost of Produced Goods by Activity in 2020

Main Production Cost Centers Total Cost (TL)

Peeling 56.206.845,00
Drying 33.724.107,00
Pressing 16.862.053,50
Storage 5.620.684,50
Cost of Goods Produced 112.413.690,00

By using the allocation rate formula, allocation rates based on departments are summarized in Table 6
below

Table 6: Allocation Rates

Units Allocation Rate (%)

Peeling 0.50
Drying 0.30
Pressing 0.15
Storage 0.05
Total 1.00

Peeling section allocation rate = 56,206,845.00 TL / 112,413,690.00 TL = 0.50,

Drying section allocation rate= 33.724.107.00 TL / 112.413.690.00 TL= 0.30,

Pressing section allocation rate= 16,862,053.50 TL / 112,413,690.00 TL= 0.15, and

Storage section allocation rate= 5.620.684.50 TL / 112.413.690.00 TL= 0.05.

Kaizen Cost Target for Each Unit = Current Year Kaizen Cost Target (3) x Allocation Ratio

After the allocation rates are determined, the kaizen cost target for each department is reached when
the current year is multiplied by the kaizen cost target. In other words, each department has kaizen cost
reduction targets. The cost reduction targets calculated by multiplying the 2021 kaizen cost target of
2,100,000 TL calculated in the 3rd step with the allocation rate of each division are shown below based
on units.

Table 7. Kaizen Cost Reduction Targets Allocation Rate by Units Kaizen Cost Reduction Target (TL)

Units Allocation Ratio (%) Cost Reduction Target

Peeling 0.50 1,050,000.00
Drying 0.30 630,000.00
Pressing 0.15 315,000.00
 Storage 0.05 105,000.00
Total 1.00 2,100,000.00

As can be seen from Table 7, in order for the plywood business to reach 13% profitability in 2021 with a
unit sales price target of 2,900 TL and to produce with a total target cost of 126,150,000 TL, It has been
distributed to the units through allocation rates, which should reduce its costs by 2,100,000 TL in total,
including 1,050,000 TL in the peeling, 630,000 TL in the drying, 315,000 TL in the pressing, and 105,000
TL in the storage section.

Kaizen costing is an essential branch of the philosophy of kaizen, which is not content with the current
situation and aims at continuous improvement. Based on Japanese manufacturing practice, kaizen
costing focuses on continuous improvement during the production phase of a product's life cycle to
reduce costs. In Kaizen costing, the aim is not to stabilize a production process according to
predetermined working standards. The aim is to improve critical processes continuously so that costs
can be continuously reduced in product lines that are mature, highly price-sensitive, and not prone to
product innovation. Kaizen strategy requires never-ending efforts for improvement that includes
everyone in the organization, managers, and employees alike Kaizen costing is aimed at ensuring the
continuous improvement of production costs during the production phase. The target costing process,
which starts at the development stage of the product, continues with kaizen costing in the production
stage, thus ensuring a continuous improvement of costs. With the increase in production within the
country, competition has also increased. In the face of increasing competition, manufacturers are
experiencing price pressure in the market. At this point, it is not possible to increase product prices to
increase profitability. Therefore, it is necessary to keep costs under control. Understanding the
importance of kaizen costing is necessary at this point to control costs in production processes and to
avoid all kinds of unnecessary activities and waste. It should be expected that more kaizen costing
studies for businesses operating in other sectors will make businesses stronger over time, increasing the
country's competitiveness.