What is the difference between target costing and kaizen costing?

Question

CMA Final SCM theory questions ask about target costing and kaizen costing. They both reduce cost, so how are they different?

GradeHunt_Team · Answer

Both aim at lower costs, but they act at different stages of a product's life.

Target costing:
- Used at the design and development stage, before production starts.
- Target cost = expected selling price - required profit margin.
- The product is designed so that its cost does not exceed the target cost, using value engineering and cross-functional teams.
- Market-driven: the price the customer will pay is the starting point.
- Most cost is locked in at design, so this is where large savings are possible.

Kaizen costing:
- Used at the manufacturing stage, after the product is launched.
- Aims at small, continuous cost reductions period after period.
- Targets are set for each period (for example, a 2% reduction a month) and achieved through process improvements suggested largely by workers on the shop floor.
- Focus is on the production process, not the product design.

Key differences in one line each:
- Stage: design vs production.
- Size of change: large, one-time design changes vs small, continuous improvements.
- Who drives it: design and engineering teams vs operators and supervisors.
- Starting point: market price vs current actual cost.

How they fit together: target costing sets a cost the product can reach, and kaizen costing keeps lowering it after launch. Many firms use both.

Exam tip: end a theory answer with this link between the two. It shows you understand how the two methods work together, not just the definitions.

What is the difference between target costing and kaizen costing?

1 answer