What is the difference between target costing and kaizen costing?

Answer 1

In target costing the costs is determined by finding out how much the customers are willing to pay for the service or product. The selling price is adjusted for the profit which determines the cost at which the product or service should be produced. When the target cost is less that the actual costs then decisions needs to be made to reduce the costs. For example the remove non value adding features to the product or service.

Kaizen costing involves the continuous addition of small costs to the product or service until it meets its desired level for the customer.

Target costing can said to be retrospective costing whilst kaizen is prospective costing.

Answer 2

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 follwoing principles:

---Employees are the source of solutions;

---Cost reductions are achieved by continuous improvement;

---Cost reduction targets are set every month;

Target costing ie estimated selling price -TARGET COST=desired level of profit.

It is an integral part of a strategic profit management system. The determination of the target cost starts by determining an estimate of the selling price for a new product that will help achieve the reuired share of the market(revenue/market size *100).

This selling price is then reduced to obtain the desired level of profit, having regard for the firm's required rate of return on new capital investments and working capital requirements. The difference b/n the sp and the desired profit produces the target cost.

This target cost is then compared with the estimated current cost level. Where a gap exists it is brigded by using valu analysis, value engineering, functional analysis, continuos improvement etc.