Kaizen costing is a cost reduction approach popular in Japan and now having global implication is explained below.
It is a cost reduction process which aims continuous improvement in manufacturing process. It sets monthly cost reduction target and try to get a target profit based on monthly basis and ultimately achieves annual cost reduction. It was first applied by a Japanese car manufacturer Daihatsu where six plans were involve:
Plan 1- Production, distribution, and Sales Plan(which includes projections of contribution margins from sales).
Plan 2- Projected parts and Materials Costs.
Plan 3– Plant Rationalization Plan(projected reductions in manufacturing variable costs).
Plan 4- Personnel Plan(for direct labor work force and service department personnel).
Plan 5- Facility Investment Plan (capital budget and depreciation).
Plan 6- Fixed Expense Plan(for prototype design costs, maintenance costs, advertising and sales promotion expenses, and general and administrative expenses).
Above six steps become the target profit basis. It aims to reduce both fixed cost and variable cost on the systematic basis on the monthly mode. Prior year data becomes the basis in both type of the cost. Reduction rate adjustment is done based on the target price. It allows management to decide the future cost reduction strategy.