Kaizen costing is a cost reduction system. Yasuhiro Monden defines kaizen costing as "the maintenance of present cost levels for products currently being manufactured via systematic efforts to achieve the desired cost level." The word kaizen is a Japanese word meaning continuous improvement.
Monden has described two types of kaizen costing:
- Asset and organisation specific kaizen costing activities planned according to the exegencies of each deal
- Product model specific costing activities carried out in special projects with added emphasis on value analysis
Kaizen costing is applied to products that are already in production phase. Prior to kaizen costing, when the products are under development phase, target costing is applied.
After targets have been set, they are continuously updated to display past improvements, and projected (expected) improvements.
Adopting Kaizen costing requires a change in the method of setting standards.
Kaizen costing focuses on "cost reduction" rather than "cost control".
Types of costs under consideration
Kaizen costing takes into consideration costs related to manufacturing stage, which include:
- Costs of supply chain
- Legal costs
- Manufacturing costs
- Recruitment costs
- Marketing, sales and distribution
- Product disposal