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The usefulness of standard cost systems, which have been used as the primary cost control vehicle by U.S. firms for the last several decades, recently has been questioned by many practitioners and academicians.
Activity-based cost management has gained a prominent status in cost management by clearly depicting the demands a firm's various activities, production as well as other corporate functions, place on the firm's resources. On another front, target costing has emerged as the system that is effective in managing costs in the new product design and development stage.(1)
Kaizen costing, a critical means of ensuring continuous improvement activities used by Japanese auto makers, supports the cost reduction process in the manufacturing phase. Employed together with target costing, Kaizen costing helps Japanese manufacturers achieve their goal of cost reduction in the entire product design development production cycle.
To illustrate this process, we look at the Kaizen costing practice used by Daihatsu Motor Company of Osaka, Japan. Daihatsu, a minicar manufacturer owned in part by Toyota, ranks seventh of the nine Japanese automakers in terms of their domestic sales volume. In Japan, Daihatsu's minicar sales out number Isuzu, Mazda, and Subaru. It has established minicar markets in more than 120 countries. In the United States, Daihatsu began marketing Charade, its only U.S. passenger car, and Roc, a sports truck, in 1988 from its subsidiary, Daihatsu America Inc. of Los Alamitos, Calif. In early 1992, Daihatsu announced its plan to withdraw from the U.S. market due to its strategy change. As a partner of Daihatsu, Toyota uses a similar system of Kaizen costing discussed here.
THE AIM OF KAIZEN COSTING IS DIFFERENT
Kaizen costing, functioning in a similar fashion as a budgetary control system, operates outside the standard cost system. It aims at reducing the actual costs below the standard costs--in distinct contrast to the focus of a standard cost system, which emphasizes meeting the cost standards. Daihatsu's Kaizen costing calls for the establishment of a cost reduction target amount, and its accomplishment through Kaizen activities--continuous improvement in operations.
Daihatsu defines Kaizen costing activities as those activities that "sustain the current level of the existing car production costs, and further reduce it to the expected level based on the company plan." These cost-improvement activities are very specific...