What is Kaizen Costing?
Kaizen costing is a continuous-improvement cost method used during a product's production phase: instead of a one-time target, small teams set incremental cost-reduction targets period after period. It complements target costing, which fixes the cost before launch, by continuing to squeeze out waste after production begins.
Kaizen costing sets small, continuous cost-reduction targets during production, calculated as: New Cost = Current Cost × (1 − Kaizen Reduction Rate).
- 1.Plan — Set a small period cost-reduction target (e.g. 3%)
- 2.Do — Implement process changes on the production line
- 3.Check — Compare actual cost against the reduction target
- 4.Act — Standardize improvements and set the next period's target
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Step-by-step worked examples
A part currently costs $50 to produce. The team sets a 4% kaizen reduction target for this period. What is the new target cost?
r = 4% = 0.04 NC = CC × (1 − r) = 50 × (1 − 0.04) = 50 × 0.96 = $48
A production line's current cost is $1,200 per batch. Over 3 successive quarters, the kaizen target is 2% reduction each quarter. What is the cost after 3 quarters?
Q1: 1,200 × 0.98 = $1,176 Q2: 1,176 × 0.98 = $1,152.48 Q3: 1,152.48 × 0.98 = $1,129.43 (rounded)
A factory reduced cost from $80 to $76 in one period. What was the kaizen reduction rate achieved?
Reduction = 80 − 76 = $4 Rate = 4 / 80 = 0.05 = 5% The team achieved a 5% kaizen reduction rate
Flashcards
Quick quiz
Q1.Current cost is $200, kaizen reduction rate is 5%. What is the new cost?
Q2.Kaizen costing is applied mainly during:
Q3.Kaizen costing is based on which improvement cycle?
Q4.If a cost dropped from $100 to $95, what kaizen reduction rate was achieved?
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Common mistakes
Confusing kaizen costing with target costing. — Correct: Target costing fixes cost before launch; kaizen costing keeps reducing cost during ongoing production.
Expecting one large cost cut instead of small repeated ones. — Correct: Kaizen costing works through small, continuous reductions each period, not one big change.
Applying kaizen costing only to raw materials. — Correct: It applies to all production costs — labor, overhead, materials, and process waste.
Treating the kaizen rate as fixed forever. — Correct: Reduction targets are reset and reviewed every period based on results.
FAQ
What is kaizen costing?
A cost-management method that sets small, continuous cost-reduction targets throughout a product's production life.
What is the kaizen costing formula?
New Cost = Current Cost × (1 − Kaizen Reduction Rate).
What are examples of kaizen costing?
A factory targeting a 2-3% cost cut each quarter through small process improvements is a classic kaizen costing example.
How do you calculate the kaizen reduction rate?
Divide the cost reduction achieved by the original cost: rate = (Current Cost − New Cost) / Current Cost.