Dear All,
Kaizen budgeting incorporates expectations for continuous improvement into budgetary estimates. Kaizen costing determines target cost reductions for a period, such as a month. Thus, variances are the differences between actual and targeted cost reduction. The objective is to reduce actual costs below standard costs. The cost-reduction activities associated with the Kaizen approach minimize costs throughout the entire product life cycle. Therefore, it has the advantage of being closely related to the entity's profit-planning procedures. Kaizen is based on the belief that the people doing a particular job will often know better than everyone else, including their superiors, how that job can be improved; and that they should be given the responsibility for making those improvements. Kaizen Budgeting is an approach that explicitly incorporates continuous improvement during the budget period into the budget numbers. The emphasis here is on many small improvements, rather than on quantum leaps. A journey of a thousand miles starts with a single step. The budget numbers are based on changes that are yet to be implemented, rather than on current practices or methods.
Kaizen is a very simple concept, formed from two Japanese characters: “kai”, meaning “change”; and “zen”, meaning “good”. Therefore, “kaizen”, means, “change for the better”, or “continuous improvement” (Cane, 1996, p3). The creator of the concept of kaizen, or continuous improvement, was the late Dr. W. Edwards Deming, an American statistician who made many visits to Japan in the years following World War II. Dr. Deming’s work was so widely regarded as the driving force behind the resurgence of the Japanese economy during this time, that one of Japan’s most coveted awards was later named the Deming Prize. Ironically, American businesses showed little interest in Dr. Deming’s work until the late 1970s when Japanese exports began to make a marked impact on the economy (Cane, 1996, pp 4-5). To paraphrase Matthew 13:58 in the New International Bible, a prophet is indeed without honor in his own country.
Thanks and Regards,
Pranav Vaidya
Article Assistant
Gokhale & Sathe
Chartered Accountants
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