Use Kaizen Costing when you want to in a systematic way, perform Cost Rationalization.
The main objective of Kaizen Costing is the relentless pursuit of cost reduction at every stage of manufacturing to help close any gaps between target profits (budget profits) and estimated profits. This approach differs both conceptually and procedurally from cost management as practiced in a standard costing system.
Conceptual Differences:
A Standard Costing system:
- Exercises control to make actual costs equal standard costs (objective is cost maintenance).
- Assumes that current manufacturing conditions will be maintained and not changed.
A Kaizen Costing system:
- Is a cost reduction system that aims to reduce actual costs to below standard costs.
- Exercises control to achieve cost reductions
- Continually changes current manufacturing conditions to reduce costs.
Procedural Differences:
A Standard Costing system:
- Sets standard costs once or twice a year.
- Conducts analyses of differences between standard costs and actual costs.
- Carries out investigations and corrective measures when standard costs are not achieved.
A Kaizen Costing system:
- Sets new cost reduction targets every month; these targets are designed to close gaps between target profits (budgeted profits) and estimated profits.
- Conducts Kaizen (continuous improvement) activities throughout the business year to achieve target cost reductions.
- Conducts analyses of differences between target costs and actual costs.
- Carries out investigations and corrective measures when target cost reductions are not achieved.
The following aspects of a part and its structure are considered.
The required cost reduction.
The difference between Total cost for the Part and the required cost reduction.
Reduction Type is defined in Costing Basic Data and gives opportunity to work with predefined Reduction Type. Reduction Type could address activities at specific Cost Centers.
Kaizen Status is defined in five different statuses;
- Initiated, where the idea is registered as an possible solution to reduce cost.
- Preliminary, where substantial fact for feasibility is presented and resources can be assigned to the Project, and Approved ROI status shows Go.
- Finally, where Project has delivered the result at the requested date, and implemented the changes to the part.
- Verified, where actual savings are a fact.
- Canceled, where an idea is not feasible.
Pay Back:
In capital budgeting, the length of time needed to recover the cost of a capital investment. The Pay Back period is the ratio, expressed in time, of the initial investment (cash outlay) to the annual cash inflows for the recovery period.
Pay Back Period = Total investment / Average of the NPVs of the annual inflows
Net Present Value:
Method used in evaluating investments whereby the net present value of all cash outflows (such as cost for investments) and cash inflows (returns) is calculated using a given discount rate, usually a required rate of return. An investment is acceptable if the NPV is positive.
Calculates the net present value of an investment by using a discount rate and a series of future payments (negative values) and income (positive values). Rate is the rate of discount over the length of one period.
NPV = Future Value (year one)/(1+K)^1 + Future Value (year two)/(1+K)^2 + Future Value (year three)/(1+K)^3 + ....... - Total investment year 0, K is the reinvestment rate
Modified Internal Rate of Return
Discount rate at which the net present value of the future cash flows of an investment equal the cost of the investment. It is found by a process of trial and error; when the net present values of cash outflows (the cost of the investment) and cash inflows (returns on the investment) equal zero, the rate of discount being used is the IRR. When IRR is greater than the required return the investment is acceptable.
The Modified Internal Rate of Return does not use IRR ratio to reinvest, it might turn out that you will have reinvestment rate that is not appropriate with the realistic level.
If you run the formula in another application, for example MS Excel, there might be some deviations in the result caused by simplification of the formula.
MIRR = (Annual Inflows * (1+K)^1 + Annual Inflows * (1+K)^2 + Annual Inflows * (1+K)^3 + ....))/ Total Investment y0)^1/n - 1
Returns the modified internal rate of return for a series of periodic cash flows. MIRR considers both the cost of the investment and the interest received on reinvestment of cash.
Finance_rate is the interest rate you pay on the money used in the cash flows.
Reinvest_rate is the interest rate you receive on the cash flows as you reinvest them.
In this case no outflows are supposed to be calculated, if Depreciable part of investment is high it would be compensated by higher Requirement ratio. Functionality regarding depreciable cost will be handled by later versions.
Extra features: