Kaizen budgeting
Kaizen budgeting builds a small, continuous cost-reduction target into each period's budget, so the standard cost baseline is expected to fall period after period rather than stay fixed.
What it is
See it move
A component's standard cost is €25.00, and the plant applies a kaizen improvement rate of 2% per month. This month's target falls to €24.50, or €25.00 times 0.98. Sustaining the same 2% target the following month compounds the reduction further, to €24.01, or €24.50 times 0.98, rather than resetting the baseline back to €25.00 each period.
The formula
Variables
- This period's kaizen target cost (€)
- Prior period's cost (€)
- Continuous-improvement rate (% per period)
Rolls a small, continuous cost-reduction target into each new period's budgeted standard cost.
Check yourself
A part's standard cost this quarter is €80.00. The division applies a kaizen improvement rate of 5% per quarter. What is the kaizen target cost for next quarter?