What is kaizen costing? 

Kaizen Costing:

Kaizen Costing is a cost management philosophy and approach that emphasizes continuous improvement (Kaizen) in the efficiency, effectiveness, and flexibility of an organization's processes, products, and services. The primary focus of kaizen costing is on incremental improvements to reduce costs and enhance overall performance. It originated in Japan and is closely associated with the principles of Lean Management.

Key Features of Kaizen Costing:

1. Continuous Improvement:
   • Kaizen costing is centered around the concept of continuous improvement. It encourages small, incremental changes to processes and systems to achieve cost reductions over time.
2. Employee Involvement:
   • Employees at all levels are actively involved in the improvement process. This includes generating ideas, implementing changes, and monitoring the results. Kaizen emphasizes a bottom-up approach to innovation.
3. Cost Reduction Focus:
   • The primary objective is to reduce costs systematically. This involves identifying and eliminating waste, improving efficiency, and finding innovative solutions to optimize resources.
4. Cross-Functional Teams:
   • Kaizen projects often involve cross-functional teams, bringing together individuals from different departments to collaborate on improving processes. This fosters a holistic view of the organization's operations.
5. Customer Orientation:
   • The ultimate goal of kaizen is to enhance customer satisfaction. By continually improving processes and products, organizations can better meet customer needs and expectations.
6. Standardization of Processes:
   • While encouraging continuous improvement, kaizen also promotes the standardization of improved processes. Standardization ensures that the improvements become the new norm for daily operations.
7. Visual Management:
   • Visual tools and techniques, such as charts, graphs, and visual displays, are often used to make it easier to understand and communicate improvement goals and progress.
8. Problem-Solving Culture:
   • Kaizen fosters a culture of problem-solving. Rather than viewing problems as obstacles, organizations adopting kaizen see them as opportunities for improvement.
9. Training and Skill Development:
   • Employee training and skill development are integral to kaizen. It emphasizes the importance of empowering employees with the knowledge and skills needed to contribute to continuous improvement.

Activity-Based Management (ABM):

Activity-Based Management (ABM) is a management approach that extends the principles of Activity-Based Costing (ABC) to incorporate strategic and operational decision-making. While ABC focuses on understanding costs associated with specific activities, ABM takes the analysis further by linking these activities to organizational strategies and objectives.

Distinguishing Features of Activity-Based Management:

1. Strategic Focus:
   • ABM aligns cost management with strategic goals. It involves identifying and prioritizing activities that contribute to strategic objectives, allowing organizations to allocate resources efficiently.
2. Decision Support:
   • ABM provides decision-makers with relevant information for strategic and operational decision-making. It helps in evaluating the impact of different decisions on costs, performance, and overall organizational goals.
3. Resource Optimization:
   • By understanding the costs associated with activities, ABM enables organizations to optimize the allocation of resources. This includes human resources, technology, and other assets.
4. Performance Measurement:
   • ABM establishes performance metrics based on key activities. These metrics are aligned with organizational objectives and provide a basis for evaluating the effectiveness of processes and activities.
5. Cost-Value Analysis:
   • Beyond merely allocating costs, ABM emphasizes assessing the value generated by different activities. This involves evaluating the cost-effectiveness of activities in relation to the value they contribute.
6. Process Improvement:
   • ABM identifies opportunities for process improvement by analyzing the costs and effectiveness of activities. It supports initiatives to streamline processes and eliminate non-value-added activities.
7. Customer Profitability Analysis:
   • ABM enables organizations to analyze the profitability of individual customers or customer segments. By understanding the costs associated with serving specific customers, organizations can make informed decisions about customer relationships.
8. Continuous Improvement:
   • Similar to kaizen, ABM promotes continuous improvement. It encourages organizations to reassess and refine their activities regularly to adapt to changing business conditions.

Both kaizen costing and activity-based management contribute to organizational improvement, with kaizen focusing on incremental changes to processes and ABM providing a strategic framework for decision-making and resource allocation. While kaizen is deeply rooted in operational improvements, ABM extends its reach to strategic and financial aspects, creating a comprehensive approach to cost management.