Kaizen Costing

Meaning
Kaizen is a Japanese term meaning, Change for better. It is a concept that focus on continuous improvement. Some of the key objective of Kaizen are: elimination of waste, quality control, just in time delivery , standardized work and use of efficient equipment. Kaizen Costing: is the reduction of present cost level for products being manufactured by systematic efforts to achieve the desired cost level.

Continue..
Thus, it is a continual cost reduction system that occurs after a product design has been completed and is now in production phase. The time prior to kaizen costing is called Target Costing which involves searching of a target cost for a product before it reaches the market. Both these two concepts make life-cycle costing, which involves all costs associated with the product during its life span.

Kaizen estimates in practice

In Kaizen Costing, standards are revised each month by which the existing gap between target and current cost is to be closed. Kaizen activities are carried throughout the year to achieve cost activities.

Advantages
Kaizen costing results into following advantages: 1. Focus on customers 2. Make improvement continuously. 3. Acknowledge problem openly. 4. Promote Openness 5. Create work-teams: Each individual in a Kaizen organization belongs to a work-team headed by a leader. Working in various teams bring employees much closer to each-other.

Backflush Costing
Backflush Costing omits recording some or all of the journal entries relating to the stages from the purchase of direct materials to the sale of finished goods. Since some stages are omitted, the journal entries for a subsequent stage use normal or standard costs to work backward to flush out the costs in the cycle for which journal entries were not made.

Life Cycle Costing

The accumulation of costs for activities that occur over the entire life cycle of a product, from inception to abandonment, by the manufacturer and the customer are known as life cycle costing.

Life-cycle stages Products can be evaluated through each stage of their life-cycle: Extraction or acquisition of raw materials Manufacturing and processing Distribution and transportation Use and reuse Recycling Disposal

Activity Based Costing

Cost of a product is the sum of the costs of all activities manufacture and deliver the product. Products do not consume costs directly. Money is spent on activities. required to

Activities are consumed by product/services.

ABC assigns Costs to Products by tracing expenses to activities. Each product is charged based on the extent to which it used an activity.

Identify Activities
In developing an ABC system, the organization identifies the activities being performed:
Activity Dictionary

Move material Schedule production Purchase material Inspect items

Respond to customers Improve products Introduce new products Explore new markets

Map resource costs to activities

Financial accounting categorizes expenses by spending code; salaries, fringe benefits, utilities, travel, communication, computing, depreciation etc. ABC collects expenses from this financial system and drive them to the activities performed.

Mapping
Accounting Records Salaries 313,000 Depreciation Electricity Supplies Travel Total 155,000 132,000 25,000 100,000 725,000
Activities Business Development Maintianing Present Business Purhcasing Material Set up Machines Running Machines Resolve Quality Problems Total ABC Records Salaries Depreciation Electricity Supplies Travel Total 20,000 80,000 1,25,000 25,000 50,000 13,000 3,13,000 155000 25000 60000 50000 10000 10000 5000 50000 20000 2000 50000 5000 132000 5000 5000 55,000

10000 2,05,000

20000 60000 2,75,000 37,000

1,10,000 25000 43,000

25000 100000 7,25,000

Throughput Costing
Variable Costing Throughput Costing Also called Direct Also called SuperCosting Variable Costing

Focuses on Contri- Focuses on Throughbution Margin put Contribution This isnt GAAP This also isnt GAAP

Example of Throughput Costing

10,000 units are made, 9,000 are sold.

Each unit sells for $350.

Variable mfg costs are $150 per unit, consisting of $90 in materials, $40 in direct labor, and $20 in variable mfg overhead. Fixed mfg costs are $700,000.

Variable non-mfg costs: $50 per unit sold.

Fixed non-mfg costs are $400,000.

Throughput Costing
Total inventoriable cost per unit:

Only the $90 in direct materials

Throughput Contribution Income Statement

Sales (9,000 x $350) $3,150,000

D.M. COGS (9K x $90)

810,000
2,340,000

Throughput Contribution Mfg costs other than d.m.:

($40 + $20) x 10,000 units 600,000 Fixed Mfg Overhead Non-mfg costs* Income
*The same as under Absorption and Variable Costing

700,000 850,000 $ 190,000

Advantages
1. Improves speed of financial reporting. 2. Brings accuracy in the data. 3. Provide true measures of overall productivity on a day to day basis.

Quality Costing
Involves quantifying the total cost of quality-related efforts and deficiencies. Shows the importance of quality-related activities to management; demonstrate the cost of non-quality to an organization; track the causes and effects of the problem, enabling the working out of solutions using quality improvement teams, and then monitoring progress. Its a powerful tool for enhancing a company's effectiveness as it is used as a technique in the introduction and development of Total Quality Management (TMQ). Provides practical advice on how to set about introducing and developing a quality costing system and using the data that emerges.

Approaches to Measure Cost of Quality

The Quality costs are categorised into Prevention-Appraisal-Failure (PAF). This approach is most widely accepted for quality costing. The failure costs in this approach can be further classified into 2 subcategories-Internal failure & External failure. The 3 categories of costs can be described as: Prevention costs Appraisal costs Failure Costs Internal failure costs External failure costs Total Cost of Quality= Prevention Costs +Appraisal Costs + Internal Failure Costs + External Failure Costs