SD manufactures and sells a small range of timber based products. The main differences b/w the products are their size and the type of timber they used. SD prepares annual budgets & sets a standard cost for each different product at the begining of each year. Variance reports are produced every month. Recently, there have been significant differences between the actual costs and standard costs of the products manufactured.SD recently introduced a system of Kaizen Costing which has resulted in changes to the methods used by manufacture in the timber products. Some of the directors of SD have suggested that the use of standard costs as a means of monitoring performance is no longer appropriate and that the monthly variance report is meaningless.
(a) Explain the principles of Kaizen Costing.
Kaizen Costing is a system of cost reduction which is based upon the concept of continuous review of systems and procedures to identify and implement small incremental cost savings. It is used in the production phase of a product and employees are both encouraged and empowered to recommend changes that they believe will reduce costs without affecting the quality of products or otherwise affect the customer’s perception of products