Continuous Improvement Budgeting With Kaizen
 
 

Continuous Improvement Budgeting With Kaizen 

Key Definitions

1.    Budget – This is an estimate of expenditure and income expected to be incurred or earned over a given period of time.

2.    Timeframes – A specified period within which an action must take place.

3.    ABC method – A system of arranging costs according to their importance.

4.    Target-costing – A system of determining a product or service life-cycle cost.

Introduction:

A budget keeps your finances on track by reducing debt, planning for unforeseen expenses, and cutting costs. Different budgeting approaches exist, but this article will focus on Kaizen budgeting or continuous improvement budgeting.

Kaizen budgeting is defined as a budgeting technique focusing on continuous improvement from a service or product perspective. Kaizen budgeting requires management to set goals based on future plans for process and operational improvements, rather than creating budgets based on the existing cost structure. It forces management to cut costs in the current budget period, otherwise, the planned goals – which are based on improved plans and cost structures – cannot be attained. Kaizen budgets drive managers to reduce an organization's expenditures by implementing small, incremental changes.

Kaizen budgeting is not just an end-result-specific budgeting technique that satisfies the objective of not exceeding a proposed budget, but it depends on continuous change for the better to lower costs. It reduces costs through continuous budget improvements as opposed to focusing on annual fiscal analysis like typical budgeting does.

According to Takao Kikuchi, a Japanese industrial designer, ‘Kaizen budgeting should be part of Kaizen activity total quality control."

Kaizen budgeting has also been defined by Charles T, 1997, an American professor and author, as a budgeting technique that is based on constant improvement to attain the projected figures during a certain period.

Fundamentals of Kaizen Budgeting

There are some Principles of Kaizen budgeting that you need to know. They are summarized in the table below:

General Information

Description

Purpose

 

  •  To demand continuous improvement and to integrate all improvement in the budget
  • To push for high performance and innovation from the firm and suppliers 

Appropriate use

  • Often used in highly competitive manufacturing industries.
  •  It's also suitable for use in firms that want to continuously improve their product and processes

Timeframe

  • Kaizen budgets can be developed for any time frame; a year, six months, one month, etc.

Kaizen Budgeting – The Right Approach

According to California State University, Sacramento, "Kaizen Budgeting is all about working smarter to reduce costs, not harder. Rather than just racing to lower costs within a short timeframe, Kaizen budgeting systematically seeks better ways as opposed to faster ways of reducing expenses.

A kaizen budget requires management to analyze even the tiniest details of a budget to explore as many improvements opportunities as possible. It requires management to review all aspects of a processes, even those that save time, and hence money. 

Toyota production model is built so much on the principle of Kaizen that the company says, "Kaizen is at the heart of everything we do at Toyota." The same level of commitment is required for successful implementation of Kaizen budgeting. Elements of the budget must be clearly defined and adhered to, unless change is needed. Note that whenever necessary, modifications are implemented immediately in the true spirit of Kaizen.

In kaizen budgeting, if an organization does not realize the budgeted costs reduction, it reviews the operating functions or parts where it did not realize the cost reduction objective. This analysis provides data that managers can use to implement changes in the process or in the budget.

Identifying opportunities for costs reduction and implementing the necessary adjustments - continuous change for the better - requires strong communication. Managers need to involve the employees responsible for running the processes or producing the products, supervisors that oversee the processes, and the accountants responsible for buying materials.  

It's important to note that done well, Kaizen budgeting has a ripple effect, assisting the entire organization to adhere to Kaizen principles, not just the budgeting department or the accounting staff.   

How to Develop a Kaizen Budget

It is very easy to develop a continuous improvement budget, but first things first, bear the following in mind:

1.      Kaizen budgeting process is not limited to internal improvements. It can be applied to drive improvement in dealings with suppliers to achieve favorable delivery schedules and reduced cost of components.

2.      A Kaizen budget reduction is not the same thing as a budget cut that we often see governments or firms make in face of budget crisis. Most of the kaizen cost savings arise from hundreds of small improvements as opposed to a "quantum leap".


 

3.      Kaizen budgeting stresses manufacture of quality products and working together with employees to obtain suggestions for improving processes.

4.      Kaizen budgeting reduces costs by doing the same activity more efficiently, not by arbitrarily eliminating components or activities of a budget.    

From what you have seen so far, Kaizen budgeting has two definitions:

  • In management accounting, "Kaizen budgeting refers to budgeting with the aim of continuously improving or reducing the number of work hours/product unit."

  • In cost accounting, kaizen budgeting is used as a method of reducing cost.

In the next part, we will look at how kaizen budgeting is used by organizations to reduce cost.

Kaizen Costing vs. Target-costing

In Kaizen budgeting, kaizen costing is used in place of target costing – used in the ordinary budgeting approaches. The two costing methods are similar in that they both give a target cost, but they differ in two major ways:

1.    How they set the targets costs – Target costing starts from the demand of the consumer, but Kaizen costing starts from the desired profitability of the objectives designed by management. 

2.    Application Modes – Target costing is primarily used by the product design team prior to product manufacture and launch. Kaizen costing is used during the actual production and launch of a product.

To achieve the projected profitability, kaizen costing requires improvement of the production processes through:

  • Optimizing machine setup.

  • Optimizing the launch system.

  • Enhancing efficiency of production machines.

  • Boosting staff motivation and formation

  • Encouraging the team charged with the process of identifying opportunities for costs reduction.

H. Bouquin, a professor and author of Comptabilite de Gestion, 2004, underlined that KC focuses on reducing production costs. He writes that there are six components of Kaizen budgeting, and which Daihatsu, the oldest Japanese motor vehicle manufacturer and a major stakeholder in Toyota, uses as the key elements of its five-year budget plan. They are:

1.    A budget that defines sales, variable costs (VC) and margins.

2.    A budget for the supply of raw materials.

3.    A budget for reducing VC and rationalizing the plant – the primary part of Kaizen

4.    A budget for the use of labor.

5.    An investment budget.

6.    A budget for general expenses and the capacity costs of the organization      

The Kaizen costing concept is best illustrated in the diagram below:


Just like Toyota Company, Daihatsu applies direct costing in its industry in order to motivate workers to reduce cost. From the graph above, it's clear that under kaizen costing, the standard cost of the second year is the cost attained at the end of the first year.

 

The concept which supports kaizen costing is the same one that supports target cost; they are both computed based on standard cost. Therefore, the analysis and monitoring of the deviations is realized through the use of a conversion table. For example, the number of target hours shown in the table below:

No

Activities

Engine one

Engine two

Engine three

Target unit time

Effective unit time

Target unit time

Effective unit time

Target unit time

Effective unit time

0

 

3

2

5

4

7

6

1

Assembly

7

8

3

4

5

6

2

Quality control

2

2

1

1

2

2

3

Processing

3

3

1

1

3

4

4

Manipulation of material

5

6

2

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2

4

5

5

Total work hours

17

19

7

8

14

17

6

Target cost

12.800

-

7.400

-

10.000

-

The table above is obtained by taking the data concerning the target hours and the target cost corresponding to a certain month, which is determined by using TC method, for the 3 engines manufactured by a firm specialized in the manufacturing of engines (Daihatsu), and the related effective time. The average monthly production of 85, 1,220, and 150 pieces for engines 1, 2, and 3 respectively is estimated for the whole lifecycle of the 3 products – for a duration of 4 years.

Taking model engine 2 as a reference, the performance is computed by taking into account its target time (7 hours), and then using KC method to obtain the data below:

No

Explanations

Manufactured quantity pieces

Target unit time

Target total time

Estimated cost lei/piece

Effective unit time

Effective total time

0

1

2

3

4

5

6

7

1

Engine 1

85.0

17.0

1.45

16.17

19.0

1.62

2

Engine 2

220.0

7.0

1.54

9.75

8.0

1.76

3

Engine 3

150.0

14.0

2.10

12.53

17.0

2.22

4

Total

-

 

5.09

-

-

5.93

5

Target in equivalent engine 2

5.09/7 = 726.0

-

-

-

-

-

6

Effective time in equivalent engine 2

-

-

-

-

-

5.93/726 = 8,1ore

7

Performance

-

1/8, 16=85. 78 percent

-

-

-

 

The effective time would have allowed the production of 726 engines from model 2 – requiring 8.16 hours - meaning a performance of 85.78 percent. This phenomenon is more feasible from the perspective of the huge differences between the estimated and target costs of (16.17-12.8) 3.37 lei for engine 1, (9.75-7.4) 2.35 lei for engine 2, and (12.5-10) 2.53 lei for engine 3.

Nevertheless, developing the budget through the Kaizen method involves continuous improvement, which entails finding practical solutions so as to reduce the difference without affecting product quality or value. For example, a reduction in the volume of production works hours as shown in the table below:

No

Explanation

Quarter 1

Quarter 2

Quarter 3

Quarter 4

0

1

2

3

4

5

1

Engine 1

17

15

13

8

2

Engine 2

7

6

8

6

3

Engine 3

14

12

13

9

In quarter 2, we can take model engine 2 as our reference and use KC method to obtain the table below:

No

Explanation

Manufactured quantity pieces

Target unit time

Total unit time

Estimated cost lei/piece

Effective unit time

Effective total time

0

1

2

3

4

5

6

7

1

Engine 1

85.0

15.0

1.28

15.55

16.0

1.36

2

Engine 2

220.0

6.0

1.32

8.93

6.0

1.32

3

Engine 3

150.0

12.0

1.8

11.72

12.0

1.8

4

Total

-

-

4.33

-

-

4.48

5

Target in equivalent engine 2

4.4/6=732

-

-

-

-

-

6

Effective time in equivalent engine 2

-

-

-

-

-

4.48/732=6.1ore

7

Performance

-

6/6,1=98.36 percent

-

-

-

-

From the table, you can see that the performance achieved is higher (98.36%) than the previous one (86.76%).

The traditional computation system which involves division of the organization in autonomous spaces and budget reserves, represent a barrier to adoption of KC and TC methods. To overcome this situation, firms must utilize tools that require a transversal organization (multidisciplinary teams, simultaneous engineering, and projects), dialogues (transversal), a motivation and career management system that supports collective solutions, and an organizational culture focused on customer satisfaction.

The criticism of the KC and TC methods refers, first, to the stress the employees are subjected to due to their usage. In response to this situation, some firms prefer to reduce the level of performance generated by these techniques in order to minimize stress.

In order to realize the continuous cost reduction goal, Kaizen budgeting must target the whole firm, and this involve effective management which must concentrate on the following areas:

1.    Control of different phases of a product or service lifecycle.

2.    Ensuring that the new service or product will be profitable during the entire time of its life cycle – in a progressive manner.

3.    Continuous reduction of cost. For example, Citizen's Plant in Tokyo budget involves a 3 percent annual reduction of cost of buying raw material. 

4.    Establishing all the factors of the supply chain with a view to help the supplier reduce their own costs.

5.    Motivation and mobilization of all the competencies within a firm through a transversal technique, thus favoring competition.

To conclude, a significant element of cost reduction related to budgeting through the Kaizen method results from little improvements and not from gradual leaps.  

 
 
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