Question

Forever Mart ​(F​M) has a Kaizen​ (continuous improvement) approach to budgeting activity area costs for each month of 2019. Each successive​ month, the budgeted cost driver rate decreases by 0.2​% relative to the preceding month​ (so, for​ example, February's budgeted cost driver rate is 0.998 times​ January's budgeted cost driver​ rate, and  March's budgeted cost driver rate is 0.998 times the budgeted February 2019 rate). FM assumes that the budgeted amount of cost driver usage remains the same each month.

		January 2019	January 2019 Budgeted
		Budgeted	Amount of Cost Driver Used
		Cost Driver	Soft	Fresh	Packaged
Activity	Cost Driver	Rate	Drinks	Produce	Food
Ordering	Number of purchase orders	$99.00	14	21	14
Delivery	Number of deliveries	$86.00	13	69	18
Shelf-stocking	Hours of stocking time	$27.00	16	175	90
Custmer supprt	Number of items sold	$0.18	4,800	34,900	10,750

Required

1.	What is the total budgeted cost for each activity and the total budgeted indirect cost for March 2019​?
2.	What are the benefits of using a Kaizen approach to​ budgeting? What are the limitations of this​ approach, and how might FM management overcome​ them?

Answer 1

1.

Budgeted Cost-Driver Rates

Activity	Cost Hierarchy	January	February	March
Ordering Delivery Shelf-stocking Customer support	Batch-level Batch-level Output-unit-level Output-unit-level	$90.00 82.00 21.00 0.18	$89.82 81.84 20.96 0.18	$89.64 81.67 20.92 0.179

The March 2019 rates can be used to compute the total budgeted cost for each activity area in March 2019:

Activity	Cost Hierarchy	Soft Drinks	Fresh Produce	Packaged Food	Total
Ordering $89.6414; 24; 14 Delivery $81.6712; 62; 19 Shelf-stocking $20.9216; 172; 94 Customer support $0.1794,600; 34,200; 10,750 Total	Batch-level Batch-level Output-unit-level Output-unit-level	$1,255 980 335 823 $3,393	$2,151 5,064 3,598 6,122 $16,935	$1,255 1,552 1,966 1,924 $6,697	$4,661 7,596 5,899 8,869 $27,025

2.                  A kaizen budgeting approach signals management's commitment to systematic cost reduction. Compare the budgeted costs from Exercises 6-27 and 6-28.

	Ordering	Delivery	Shelf Stocking	Customer Support
Exercise 6-27	$4,680	$7,626	$5,922	$8,919
Exercise 6-28 (Kaizen)	4,661	7,596	5,899	8,869

The kaizen budget number will show unfavourable variances for managers whose activities do not meet the required monthly cost reductions. This likely will put more pressure on managers to creatively seek out cost reductions by working “smarter†within FM or by having “better†interactions with suppliers or customers.

One limitation of kaizen budgeting, as illustrated in this question, is that it assumes small incremental improvements each month. It is possible that some cost improvements arise from large discontinuous changes in operating processes, supplier networks, or customer interactions. Companies need to highlight the importance of seeking these large discontinuous improvements as well as the small incremental improvements.