These two are not really rivals. They are two halves of one Japanese cost-management system, born inside Toyota, working at two different stages of the same product's life. Target costing does its work in development, before a single unit is made, engineering the cost down to what the market allows. Kaizen costing takes over once production starts, grinding cost down month by month on the shop floor. Same goal - a lower cost and a protected margin - achieved at two different moments. This page sets them side by side and shows how they fit together.
Target costing and kaizen costing pursue the same goal - lower cost, protected margin - at two different stages of the product lifecycle. Target costing (genka kikaku) acts in development and design: the market sets the price, the firm subtracts its profit, and the allowable cost (Target Cost = Target Price - Target Profit) is engineered into the product through value engineering, before production, where roughly 80 to 90 per cent of cost is locked in. Kaizen costing acts in production: it is continuous, incremental cost reduction after the product is already being made, the operational complement that chips remaining cost away month by month. You do not really choose between them; you sequence them - target costing in development, then kaizen costing in production. If forced to pick, target costing has the larger leverage, because design locks in most cost. Together with cost maintenance they form Toyota's lifecycle cost management, tied to the Toyota Production System and lean. ---
The core difference
The cleanest way to see the difference is to ask where in the product's life each method works, and how big its move is.
Target costing
Target costing is the big, upfront, design-stage effort. The market sets the price, the firm subtracts the profit it needs, and whatever remains is the cost the product is allowed to incur. Value engineering then redesigns the product to meet that allowable cost - before production begins, at the stage where roughly 80 to 90 per cent of a product's cost is determined. This is where most of the cost is decided, in one concentrated, cross-functional push.
kaizen costing
Kaizen costing is the small, continuous, shop-floor effort. Once the product is in production, kaizen costing sets out to reduce its cost a little at a time, month after month, through countless incremental process improvements. No single change is dramatic; the power is in the accumulation. This is where the remaining cost is chipped away, after the big decisions have already been locked in by design.
Side by side
| Dimension | Target costing | Kaizen costing |
|---|---|---|
| Lifecycle stageKey row | Development and design, before production | Production, after the product is in the market |
| Size of move | Big, upfront, one concentrated push | Small, continuous, incremental |
| Core logic | Target Cost = Target Price - Target Profit | Continuous cost reduction against a reduction goal |
| Main lever | Value engineering at design | Process improvement on the shop floor |
| Where cost is affected | Where most cost is decided (~80-90% at design) | Where remaining cost is chipped away |
| Driver | Market-driven (price-led) | Operational, continuous-improvement-driven |
| Origin | Japan, Toyota; documented by Monden (1995) | Japan, Toyota; documented by Monden (1995) |
| Relationship | The upfront half of the lifecycle system | The continuous half of the lifecycle system |
A worked contrast
Take an illustrative product at CaP Manufacturing (figures illustrative).
Target costing does its work before launch. The market price is EUR 200, the required profit is EUR 50, so the target cost is EUR 150. The current design would cost EUR 175, leaving a EUR 25 gap. The cross-functional team closes that gap through value engineering - simpler components, fewer parts, easier assembly - so the product can be built for EUR 150 before the first unit comes off the line. The big cost decision is made, once, at design.
Kaizen costing takes over from there. With the product now in production at EUR 150, CaP sets a continuous reduction goal - say a 3 per cent cost reduction for the year. Through a stream of small shop-floor improvements - shorter changeovers, less scrap, better flow - the team trims the EUR 150 toward EUR 145 over the following year. No single improvement is large; their accumulation moves the number. Target costing set the EUR 150; kaizen costing keeps pushing it down once the product is in the world.
When to choose which
The honest answer is that you do not choose between target costing and kaizen costing. You sequence them: target costing in development to engineer the cost in, then kaizen costing in production to keep reducing it. They are two stages of one system, not two options on a menu.
If you were genuinely forced to pick one, target costing has the larger leverage, because design locks in most of a product's cost - roughly 80 to 90 per cent. Once the design is frozen, kaizen costing can only work on what is left. That makes target costing the higher-impact discipline, but it does not make kaizen costing optional, because the remaining cost still matters and only continuous improvement reaches it.
Together with cost maintenance, target costing and kaizen costing form Toyota's lifecycle cost management, tightly tied to the Toyota Production System and lean. The point of the system is that cost is managed across the whole life of the product, not just at one moment.
Frequently asked questions
Are target costing and kaizen costing competing methods?
No. They are two halves of one integrated Japanese cost-management system, developed at Toyota. Target costing works in development to engineer the cost in; kaizen costing works in production to reduce it further. They are sequenced across the lifecycle, not chosen between.
Why does target costing have more leverage than kaizen costing?
Because roughly 80 to 90 per cent of a product's cost is locked in at the design stage, which is where target costing operates. Kaizen costing acts after production has begun, so it can only work on the cost that design left in. Target costing decides most of the cost; kaizen costing chips away at what remains.
What does kaizen costing actually do?
It pursues continuous, incremental cost reduction once a product is in production. Typically a firm sets a cost-reduction goal, such as a small annual percentage, and meets it through a stream of shop-floor process improvements - shorter changeovers, less waste, better flow. No single change is large; the effect builds up over time.
How do they fit together at Toyota?
Target costing engineers the allowable cost into the product during development. Kaizen costing then reduces cost continuously during production. Together with cost maintenance they make up Toyota's lifecycle cost management, which is tightly tied to the Toyota Production System and lean thinking.
Where are these methods documented?
Both are Japanese methods associated with Toyota. Yasuhiro Monden's Cost Reduction Systems: Target Costing and Kaizen Costing (1995) documents the pair as parts of one integrated system, which is why they are best understood together rather than in isolation.
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