Kaizen Budgeting Definition:

Kaizen budgeting is an approach to budgeting which takes into account the costs of improving the production process. Instead of projecting costs based on current practices and methods, anticipated costs based upon kaizen improvements are already incorporated in the budget with the objective of reducing future costs below actual current costs. Kaizen budgeting can be used in profit centers, cost centers, and investment centers alike, assuming those antiquated means of financial analysis are still used. More modern tools like the balanced scorecard approach fit more aptly with the holistic perspective that kaizen is meant to provide to an organization.

Kaizen Budgeting

Kaizen is a Japanese term which means continuous improvement. Kaizen budgeting, leveraging the kaizen concepts , contains within it the expectation for continuous improvements in reducing costs over the budgetary period. Frequently, the expectation is that cost reduction will arise from consistently delivered incremental improvements rather than significant specific improvements. Most of the added efficiency is expected to arise from employee suggestions. Organizations that leverage kaizen budgeting imbue their culture with the expectation that employee suggestions are recognized, valued, and rewarded.

Kaizen Budgeting Approach

When executive management embraces it, the kaizen budgeting approach signals that management has truly committed to systematic cost reduction. Since kaizen budgeting involves continual small cost reductions, in order for departments and managers to stay within their budgets, they must continually find ways to improve efficiencies within the organization.

Here’s a kaizen costing example: Let’s say that today’s processes require 4.5 hours of direct labor per unit of output and 30 minutes of indirect supervisory labor. Kaizen budgeting factors in the effect of continuous improvement by applying budgeted amounts of improvement. By applying the kaizen budgeting approach to the manufacturing labor budget for the year we get the following target costing budget:

• Q1 – 4.45 hrs DL and 29 mins IL
• Q2 – 4.40 hrs DL and 28 mins IL
• Q3 – 4.35 hrs DL and 27 mins IL
• Q4 – 4.30 hrs DL and 26 mins IL
  

Bear in mind that the practice of target costing differs from kaizen costing in that target costing is a one-shot process. For example, in target costing, the market price is observed, the desired profit calculated, and with a little simple math we obtain the target production cost. Then, management scrambles to figure out how to accomplish this target costing budget.

Kaizen Budgeting Process

However, in kaizen costing, the implications are that reduced labor-cost projections would result in corresponding improvements across the organization and process at a manageable and continual pace. Kaizen budgeting is an accounting approach in which continuous improvement is explicitly anticipated into the budget. Kaizen budgeting allows for the budgeting of incrementally decreasing costs over each budget period.

The emphasis of kaizen-based budgeting is that many small innovations will continue as the company progresses, rather than expecting or reacting to extreme changes. The budgeted figures are assumed to be caused by subtle improvements in the organization that have yet to occur, rather than simply taking today’s numbers and extrapolating into the future or drawing a line in the sand and expecting leadership to devise a plan for its attainment.

A limitation of the kaizen budgeting is that it assumes regular, but small, incremental improvements throughout the organization. Even though kaizen budgeting can consistently reduce costs for many quarters on end, a plateau will eventually be reached in this evolutionary model. The cost of operations can only be reduced a certain amount through these means, but at a certain point, the only real net gains may be through revolution rather than evolution. The continual target of evolution might just stand in the way of a revolution which would result in significant improvements to the organization or its processes.

In order to maximize their chances for long-term success, companies must continually look for the ways that their competition might put them out of business through paradigm shifts and to implement those changes themselves rather than suffering from their implementation elsewhere in the marketplace.

The kaizen budget will show an unfavorable budget variance for departments which do not attain the anticipated level of innovation and improvement. As a result, management must work within their organization to find means by which costs can be reduced.

A major aspect of kaizen budgeting is the expected resolution of inefficiencies in a given process or procedures which can be improved. Ironically, it is not the manager’s responsibility to identify and resolve these inefficiencies. In the kaizen process, the employees are the source of these nuggets of wisdom, as they live in this world day-to-day. Companies implementing kaizen budgeting believe that employees who perform do the job have the greatest understanding of how that job can be performed more effectively. Managers might feel compelled to micromanage the workers and/or the daily processes in order to identify or exact the innovation required for their budgetary compliance. But, as the ancient saying goes, “An open palm holds more sand than a clenched fist.” A key factor of the effectiveness of kaizen is the Theory Z assumption that you get more done by allowing the workers to do it all than any manager could ever impose upon their employees.

Actual experiences of Kaizen budgeting

There are many Japanese companies implementing this, one excellent example, of course, is Toyota.  Toyota is the laboratory from whence kaizen emerged prior to the concepts being brought to America.

Related posts:

1. Kaizen Approach to Budgeting The Kaizen approach to budgeting is founded upon the assumption...
2. Why Kaizen Fails (and the Secrets to its Success) [caption id="attachment_87" align="alignleft" width="300" caption="Kaizen - Why does it fail?"]...
3. Kaizen Budgeting Limitations Kaizen budgeting works by imposing gradually reduced budgets over time....
4. What is Kaizen? What does Kaizen, a Japanese method of production excellence and...
5. Kaizen Concepts for Continuous Improvement Kaizen concepts are quite different from traditional management concepts....

Related posts brought to you by Yet Another Related Posts Plugin.