Definition: Kaizen budgeting takes the concept of continual improvement and applies it to budgets and budget forecasting.
What Does Kaizen Budgeting Mean?
Kaizen refers the to Japanese philosophy of continuous improvement. This concept focuses more on improving slowly and continuously over time than gigantic changes and fast improvements. Kaizen stresses finding little areas that can be made better or improved. This concept is very useful in business.
Companies like GM use the kaizen budget strategy to cut costs in product. Basically, they look for small areas in the production process that can either be eliminated or that can be done more efficiently. This idea forces GM to constantly rethink its approach to production.
For example, GM might keep track of the direct hours it takes to bolt on a fender or paint a hood. Management compares these hours to the expected and budgeted hours. If the actual hours it took to perform the process is more than the budgeted hours, management will look into each step of bolting on fenders and painting hoods to figure out a way to cut the production time.
Each process is examined for ways to cut costs. Over time, GM develops a more efficient and cost effective way to produce cars.
The kaizen budgeting philosophy can also be used to create better products rather than being used primarily to cut costs. Managers develop a budget and must meet product standards within the set budget. This forces them to create new ways of manufacturing or develop new product ideas.