Chapter 1 noted the importance of continuous improvement, or kaizen in Japanese. Kaizen budgeting explicitly incorporates continuous improvement anticipated during the budget period into the budget numbers. A number of companies that focus on cost reduction, including General Electric in the United States and Toyota in Japan, use Kaizen budgeting to continuously reduce costs. Much of the cost reduction associated with Kaizen budgeting arises from many small improvements rather than “quantum leaps.” The improvements tend to come from employee suggestions as a result of a culture that values, recognizes, and rewards these suggestions.
As an example, throughout our nine budgeting steps for Stylistic Furniture, we assumed 4 hours of direct labor time were required to manufacture each Casual coffee table. A Kaizen budgeting approach would incorporate continuous improvement based on 4.00 direct manufacturing labor-hours per table for the first quarter of 2020, 3.95 hours for the second quarter, 3.90 hours for the third quarter, and so on. The implications: lower direct manufacturing labor costs and lower variable manufacturing operations overhead costs (because direct manufacturing labor is the cost driver of variable manufacturing operations overhead). If continuous improvement targets are not met, managers adjust the targets or work with employees to identify process improvements.
Managers can also apply Kaizen budgeting to activities such as setups to reduce setup time and costs per set up or distribution to reduce the cubic feet of each shipment or shipping cost per cubic foot. Kaizen budgeting for specific activities is a key building block of the master budget for companies that use the Kaizen approach.
A growing number of agencies in the United States, such as the Environmental Protection Agency and the Department of Defense, are using Kaizen techniques to bring together government employees, regulators, and end users to reduce inefficiencies and eliminate bureaucratic procedures. The U.S. Postal Service has identified many different programs to reduce its costs. The success of these efforts will depend heavily on human factors such as the commitment and engagement of managers and employees to make these changes.