MA – Nov 2020 – L2 – Q2a – Introduction to Management Accounting

Distinguish between Target Costing and Kaizen Costing in cost management.

Question

a) In cost management, Target costing and Kaizen costing play key roles. Distinguish between these two cost techniques.

Answer

Kaizen Costing is a Japanese concept focused on obtaining small incremental cost reductions during the production stage of the Product Life Cycle using principles such as Value Analysis and Functional Analysis. Kaizen Costing is typically based on the following principles: Employees are the source of solutions; Cost reductions are achieved by continuous improvement; Cost reduction targets are set every month.
Target Costing involves setting a target cost by subtracting a desired level of profit from the estimated selling price of a product. The process begins with determining an estimated selling price that will help achieve the required market share. This selling price is then reduced by the desired level of profit, considering the firm’s required rate of return. The difference between the selling price and the desired profit is the target cost. When a gap exists between the target cost and the estimated current cost level, it is bridged by techniques such as value analysis, value engineering, and continuous improvement.
Comparison: While Target Costing is integral in managing costs during the design and development phase of a new product, Kaizen Costing supports continuous cost reduction during the production phase. Target Costing is often used before production begins, and Kaizen Costing is applied during production to continue lowering costs.