Melco Management Accounting Research
Discussion Paper Series
No.MDP2023-001

Measurement And Utilization Of “Free Capacity” At Production
Sites: Based On The Theory Of Gemba Kaizen Costing

January 2023

Shino Hiiragi*
Professor, Aichi Institute of Technology, Faculty of Business Administration

2-49-2 Jiyugaoka, Chikusa-ku, Nagoya City, Aichi Pref. 464-0044, Japane-mail: s_hiiragi@aitech.ac.jp
Yasuyuki Kazusa
Professor Emeritus, Kyoto University;*Corresponding author

Maki Makoto Foundation
Nagoya, Japan
Discussion Paper Series of the Melco Management Accounting Research, in order to promote
the study of management accounting, has published this unfinished paper onto the Web. Pleaseobtain the permission of the author when citing this paper.

Measurement And Utilization Of “Free Capacity” At Production Sites:
Based On The Theory Of Gemba Kaizen Costing

Shino Hiiragi1, Yasuyuki Kazusa2

1Aichi Institute of Technology; s_hiiragi@aitech.ac.jp; +81-52-757-0810
2 Professor Emeritus, Kyoto University; kazusa@fpu.ac.jp

ABSTRACT
Accounting has the potential to become a useful communication tool for leanenterprises. In this study, we specifically developed Gemba Kaizen Costing(GKC), which is a new accounting theory and tool that contributes to Gemba
Kaizen. The GKC theory is a basic accounting theory based on the Toyota
Production System (TPS) and the “design-information view of open
manufacturing” theory proposed by Dr. Fujimoto. We apply the GKC by
conducting an action research by partnering with Japanese companies,
particularly Yabashi Holdings Co., Ltd. Our research shows that GKC can
map out people's improvement activities and their outcomes in Gemba.

Keywords: Gemba Kaizen, Kaizen effects, Gemba Kaizen Costing (GKC), Surplus
Production Capacity, Free Capacity

1. INTRODUCTION
For companies worldwide, global competition is no longer unusual and has become an
inevitable part of operation. For Japanese companies, using “Kaizen,” or continuous
improvement, to become a lean organization has been shown to be one of their major
strengths. Gemba is a Japanese term that means the actual and real place. In the words ofWomack (2013), “Gemba. What a wonderful word. The place – any place in any
organization – where humans create value” (Womack, 2013, p.xix). Gemba Kaizen is anapproach defined by Dr. Shingo, an emeritus professor at Utah State University who the
Shingo Prize is named after. Dr. Shingo describes Kaizen as “improvement, the act ofbettering things beyond their current status” (Shingo, 2007, p.13).
To secure customer satisfaction and earn profit, accounting control must be
incorporated into business management. Accounting control and behavior control byGemba Kaizen are the two established methods required in the field of management
control. It is essential to develop a new accounting theory that connects these two typesof control within the context of accounting.
This study proposes the Gemba Kaizen Costing (GKC) theory, which is a new
accounting theory that can promote improvement, and demonstrate its effectivenessthrough practical application. Our research approach is divided into two stages. First, wedevelop GKC as a new basic accounting theory based on previous accounting research
and manufacturing management practical knowledge, particularly the Toyota Production
System (TPS) and the “design-information view of open manufacturing” theory proposed
by Dr. Fujimoto (1999, 2007, 2012). Second, we conduct an action research by partneringwith Japanese companies. In this study, we specifically build our action research basedaround Yabashi Holdings Co., Ltd.

2. PREVIOUS RESEARCH
2.1. Cost accounting aimed at cost control
Cost control is the main purpose of cost accounting. Standard costing, activity-based
costing (ABC), activity-based management (ABM), and time-driven activity-based
costing (TD-ABC) are representative cost accounting approaches oriented toward cost
control.
In standard costing, each standard cost is determined in advance based on some criteria.
Its variations are calculated and managed only from the normal standard. However, inGemba, which evolves day by day, it is necessary to calculate the difference before andafter each Kaizen. Activity-based costing is a realistic allocation of manufacturing
overhead costs. Activity-based management focuses on a Customer Value of Activities.
Time-driven activity-based costing shows the possibility of calculating unused capacity.
As Gemba Kaizen began attracting more attention, the concept of Muda (waste) was
also noticed. While considered useful, the aforementioned accounting techniques can2only be used to control manufacturing overhead costs and do not account for Muda ineach activity.
2.2. Cost accounting focused on Muda and capacity
There are different types of cost accounting measures that consider the amount of Muda
included in costs. In material flow cost accounting (MFCA), all output cost information,
including non-product information (so-called material loss), are shown. While it isconsidered a useful method, material flow cost accounting is only limited to material costs
and does not consider Muda in processing costs.
CAM-I full capacity model, which was developed in collaboration with practitioners,
classifies various capacities from the Gemba perspective (Klammer, 1996), but only
focuses on time capacity within 24 hours and 365 days. The theory of constraints(Goldratt, 1984) focuses on the bottleneck process of the production site while inheriting
the TPS concept; during this process, the production line capacity is at its lowest,
obstructing the progress of production. The theory claims that throughput, inventory, andoperating expenses should be managed (Goldratt, 1990). By comparing how much these
expenses amount to before and after the implementation of Kaizen in each category, theproposed theory assesses the realized effects of Kaizen. However, it does not address anduse the “Free Capacity” caused by improvement because of Kaizen.
2.2.1 Lean accounting
Lean manufacturing was developed from TPS, a theory established by Ohno in his
book “Toyota Production System” (Ohno, 1978). After the book was translated into
English (Ohno, 1988), the concept of Kaizen and the productivity of the Japanesemanufacturing industry, including Toyota, began attracting more attention. Morecompanies then began to introduce and practice lean manufacturing (Womack, 1990,
2003; Modig and Ahlstrom, 2012). From lean manufacturing came lean accounting,which is the “Gemba Management Method” proposed from the Kaizen perspective. Leanaccounting was proposed as an accounting technique to address lean production systems(Huntzinger, 2007; Stenzel, 2007; Maskell et al., 2012; Katko, 2021). Based on lean
thought, the accounting calculation structure in lean accounting should be as lean as
possible. Several tools for lean accounting have been proposed.
The first is the box score (Maskell et al., 2012). As a feature of the box score, numericalvalues required by the management function are organized into three groups: production
management indicators, capacity, and performance indicators for the entire company. In
lean accounting, we compare two cases of the utilization of capacity as a result of
improvement through the Kaizen effects: when capacity is reduced, and when it is applied
to a new business. In this way, one can assess the benefits of surplus capacity in the future.
The box score can be used to examine the current situation and to simulate future
situations under different conditions (Katko, 2021). However, the accounting principle

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according to which usage capacity is divided into “net work,” “Muda,” and “non-valueadded work” is not considered.
The second tool is value stream costing (VSC) (Maskell et al., 2012). The flow ofactivities from product development to the reception of products by customers is calledvalue stream. All costs generated by the value stream are tabulated, and profit iscalculated. This can be thought of as a simple process costing for each value stream.
However, although the calculation is straightforward, it is difficult to obtain accurate
estimates of product costs. In addition, the assessment of the Kaizen effects in individual
processes is not provided.
The third tool is sales operational and financial planning (SOFP) (Maskell et al., 2012).
The value stream of the SOFP is the entire process from order reception to production,
sale, and collection of payment. Then, the sales plan, new product introductions,operations capacity plan, and financial plan for the value stream of each product or
product group are created and reviewed monthly. In lean accounting, this is called“Integrated Game Plan” (Maskell et al., 2012). However, as with box scores, SOFP is justa list of various numbers and does not specialize in data that contributes to Kaizen.
While the lean accounting method and its tools were proposed from the Kaizen
perspective, it minimizes accounting calculations, which has led to “poor accounting
communication.”
2.3. Kaizen effects measurement in Japan
In this section, we examine the attempts to measure Kaizen effects in the Japanesecompany that pioneered the Gemba Kaizen. “KAIZEN generates process-oriented
thinking, since processes must be improved before we get improved results. […] This
contrasts sharply with the result-oriented thinking of most Western managers (Imai, 1986,p.16). “In the Gemba, the supervisor manages inputs to produce outputs. […] The output
is quality, cost, and delivery, or QCD” (Imai, 2012, p.117). Therefore, the measurementof Kaizen effects in Japanese companies has traditionally been managed and evaluatedby the QCD index. However, attempts were also made to measure its economic effects,
including the Kaizen effects, on the management of companies. For instance, between the
1960s and the 1970s—a period of significant economic growth in Japan—Professors
Senju and Fushimi proposed the so-called “Engineering Economy” of corporate activities(Senju & Fushimi, 1982, 1983; Senju et al., 1986). Professor Okamoto examined cost
reduction and the measurement of its economic impact and showed that Kaizen effects
could be classified as realized and unrealized (Okamoto, 2000).
These studies share the common argument that Kaizen practices in Japanese companies
are often observed and monetarily assessed before and after corporate improvement.
However, the creation of surplus capacity and its utilization have not been addressed in
the literature. Our study contributes to the existing literature by enhancing the visibilityof Kaizen effects as expressed in monetary terms using the concept of capacity (Hiiragi

4

& Kazusa, 2016, 2017a, 2017b, 2022; Hiiragi, 2019, 2020, 2021; Kazusa, 2018). In thefollowing section, we discuss the GKC theory concerning capacity.
3. GEMBA KAIZEN COSTING
In this section, we first consider the “Gemba Kaizen and Management Innovation
Cycle” (Kazusa, 2016), a fundamental concept of GKC. We observe an increase incapacity during a cycle when Gemba Kaizen is implemented. Then, the development of
the capacity at the Gemba is schematized. Furthermore, because of Kaizen, we identify
damages in the capacity; that is, where Muda is generated, and make improvements
accordingly. Thereafter, the Kaizen effects are identified and a calculation method tomeasure them is proposed.
3.1 Gemba Kaizen and Management Innovation Cycle“Opportunity loss” is an essential concept in the relationship between Gemba Kaizen
and increased capacity. The importance of opportunity loss in Japanese management was
first proposed by Kazusa (2016). Figure 1 shows the Gemba Kaizen Cycle during the
economic growth period, and Figure 2 describes the Gemba Kaizen and Management
Innovation Cycle by incorporating the opportunity loss concept.

Figure 1 – Gemba Kaizen Cycle (economic growth period)
Source: Kazusa (2016), p. 9
[Start Point]
Increase
Operating
ProfitShortening Work Time
Reducing Muda
Shortening Lead Time
Inventory Reduction
Originality and Ingenuity

Opportunity
Loss
Avoidance

Increase
Sales
AmountIncrease
Production
Capacity

Gemba
KaizenBacklog

Human
Resource
Utilization

Management
ReformR&D
New Product
New Customer
StrategyFree
Capacity
Creation
Opportunity
Loss

Management

Employee
Dismissal[Focus on future
performance][Focus on current
performance]

Fixed Cost

Figure 2 – Gemba Kaizen and Management Innovation Cycle
Source: Kazusa (2016), p. 11, partly modified5

In the 1960s and 1970s, when TPS was developed and established, the Japanese
economy experienced a period of significant and stable economic growth. As shown in
Figure 1, if capacity increases without Muda, production sites that otherwise could notcatch up with demand can accept more orders, thereby increasing sales and directly
increasing profits. However, as stated by Hiiragi and Kazusa (2016), “with the collapseof the bubble in 1992, continuous high growth has ended, where demand cannot absorb
the increase in capacity, resulting in surplus capacity and thus opportunity losses
occurred.” Many Japanese companies have tried to minimize employee dismissals andfactory closures when surplus capacity occurred. Instead, they tried to understand andutilize the surplus capacity by acquiring new customers, products, and businesses. This isa feature of what is referred to as Japanese-style management. Figure 2 shows this cycle.
3.2．Capacity Transferred Eiagram: “Kaizen Map”
One of the fundamental ideas of TPS is to analyze in detail whether the work is truly
valuable for customers. Ohno Taichi, who is considered the creator of the TPS, asystematic method of Gemba Kaizen, defined the concept of Muda and other works at the
production site: “Careful inspection of any production area reveals waste and room for
improvement. […] Through close observation, we can divide the movement of workers
into waste and work (Ohno, 1988, p.57). Figure 3 shows those divisions.

Figure 3 – Understanding the manufacturing function
Source: Ohno (1988), p. 58

As described by Mr. Ohno, “we can divide the movement of workers into waste andwork” (Ohno, 1988, p.57). He divided the movement of workers into: (1) waste, which is“the needless, repetitious movement that must be eliminated immediately. For example,
waiting for or stacking subassemblies” (Ohno, 1988, p.57); and (2) work, whose two types
are “non-value-added work and value-added work” (Ohno, 1988, p.57).
The above classifications can be similarly utilized for the movement of workers andmachines as well as all activities directed toward customers. It is an epoch-making way

6

of Gemba Kaizen thinking, and it is recommended that the same idea also be applied toaccounting. Therefore, a theoretical method that can be monetarily measured is required;that is, the true visualization of the Kaizen effects by accounting.
We propose GKC as a new accounting theory for assessing the Kaizen effects and all
production capacities, including “Free Capacity” created by Kaizen in monetary terms.
Based on the practice of production sites, GKC is a management accounting theory thatinvolves both production management and accounting. We present below an overview ofthis theory and an example of its actual application.
Figure 4 shows the “Capacity Transferred Diagram” (Hiiragi & Kazusa, 2022) named“Kaizen Map” of the GKC. In the production process, from the introduction of
production resources on the left-hand side of Figure 4 to the delivery of good products
to the customer on the right-end side, the diagram indicates the contribution of the
maximum capacity to customer demand. Kaizen Map clarifies the extent to which the
input production resource is damaged and at which stage of the production process.

Figure 4 – Capacity Transferred Diagram “Kaizen Map”
Source: Hiiragi and Kazusa (2022), p. 132, modified by the author

The production resource input on the left-hand side of Figure 4 is determined by the
production system as the maximum capacity of the enterprise. Maximum capacity is
divided into “used” and “unused.” Used capacity is a “state wherein capacity is used forgood products.” Unused capacity is classified as follows: ① “Factory oriented unused
capacity” (e.g., shops, machinery); and ② “market oriented unused capacity” (i.e.,
products that are no longer wanted by customers). Some elements of used capacity cannot
contribute to the production of good products. In the used capacity reported in Figure 4,
only the value-added working time was used for producing output. Waste and non-valueadded work cannot be included in the value-added net capacity. This damage in thecapacity is termed “sleeping capacity” and is an essential point in Gemba Kaizen.

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The direct work time targeted by previous cost accounting principles corresponds tothe used resources in Figure 4. Processing costs in conventional cost accounting also
include the costs for Muda and non-value-added time, which were not utilized in output
production. In the GKC theory, we proposed to subdivide the time breakdown ofconventional cost accounting to solve this problem (Hiiragi & Kazusa, 2017a).
On the right-hand side of Figure 4, from the output production arrow to the good
production arrow, capacity is sorted out depending on whether or not output contributes
to delivering good products to the customer. Based on the GKC theory, only the portionof the used capacity that contributes to the production of good products is defined as net
capacity. Cases in which the capacity has been used to produce output, but has not beenutilized for the production of good products, involve ③ material inventory or work inprogress, ④ end materials, and ⑤ defective products. Cases in which the capacity has
been used to produce output, but has not been utilized for the production of good products,
involve material inventory or work in progress, end materials, and defective products. Allsuch cases imply the presence of capacity that has not yet reached its final destination—
we refer to these cases as “burdened capacity” in GKC.
Finally, not all output reaches the customer in the form of good products. Steps ① to
⑥ in Figure 4 denote Muda at each stage of the production process. In other words, the“Gemba Kaizen Point” needs to be improved. In addition, ⑦ shows the unused
productivity of market factors and is called “Management Innovation Point.”
4. CATEGORIZATION OF GEMBA KAIZEN EFFECTS
When production capacity increases because of improvement from Kaizen, theoutcome changes. Three important conditions occur in this situation. Figure 5 is a
simplified version of the Kaizen Map shown earlier, wherein resources are inputted intoa certain production system (Hiiragi & Kazusa, 2022). There are resources that do notcontribute to good production even though they were inputted and became capacity.
Moreover, even if they are converted into good products, they become wasteful if the
product remains in the product inventory because the customer does not buy it. Kaizen isused to eliminate this Muda.

Figure 5 – Definition of Muda by GKC
Source: Hiiragi and Kazusa (2022), p. 131

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Muda reduction increases good production. In other words, the market decides
whether to increase production. To be precise, Muda reduction improves the conversion
efficiency in production systems. How can we make use of this improved conversion
efficiency? Figure 6 shows two ways how to use the Kaizen effects (Hiiragi & Kazusa,2022).

Figure 6 – Improved Conversion Efficiency
Source: Hiiragi and Kazusa (2022), p. 134, modified by the author

One way is to increase output and the other is to reduce input. With Kaizen, many
outputs can be realized for the same input. When there is sufficient market demand, thecompany can have more room to increase production. The other way is to save the input
required for the same output. Moreover, for resources, the difference between being
variable, that is, whether it is a variable cost in accounting or a fixed cost, has an effect.
Regarding input resources, the difference between variable costs and fixed costs also
affects the results. Figure 7 shows a visualization of the Kaizen effect by the GKC (Hiiragi& Kazusa, 2022).
Based on the two simple logics in Figure 6, we organize how the Kaizen effect brings
about accounting results, which are reflected in Figure 7. The path to accounting results
starts from the physical Kaizen effect at the top left of the figure.
The first branch is the presence or absence of market demand. If something is indemand, its output can be increased, which directly realizes increased sales. This processrepresents the realization of the simplest Kaizen effect. In contrast, increasing production
even without demand will only increase product inventory. This outcome is represented
by the dotted line box, which indicates unfavorable result.

9Figure 7 – Categorization of Gemba Kaizen effects
Source: Hiiragi and Kazusa (2022), p. 137

If production is not increased because there is no demand, input can be reduced. If theresources and capacity are variable costs, they can easily be reduced. This step realizes acost reduction. However, if the costs are fixed costs, reduction is not easy to achieve. In
this case, restructuring should be avoided, as described in the dotted line box at the bottom
right corner of the Figure 7. The road to polar star is the demand generation throughmanagement reform to take advantage of fixed-costs capacity. Substitutes for investment
may be realized by utilizing the surplus capacity, called Free Capacity in GKC, whichshould lead to future sales and cash inflows.
In economic conditions that do not sell, it is not impossible to measure the Kaizen
effects even if production capacity is increased by Kaizen. But those Kaizen effects canhelp create more possibilities for a better future.
5. ACTION RESEARCH ON YABASHI HOLDINGS CO., LTD.
After examining the theories surrounding the GKC concept, we collaborated withseveral Japanese manufacturing companies. We have been working with Yabashi
Holdings Co., Ltd., since the fall of 2019 (Hiiragi & Dinh, 2022). More specifically, thetarget site of our action research is Yabashi Forestry Co., Ltd., a subsidiary of Yabashi
Holdings Co., Ltd. It is a factory involved in the timber and steel business that
manufactures pre-cut wood, required for assembling private wooden houses. In thissection, we introduce the lean journey of Yabashi Holdings Co., Ltd.
5.1 Management issue
In an interview for Newsweek’s December 2021 issue, President Tatsuyoshi Yabashi
of Yabashi Holdings Co., Ltd. explained his belief that a company should value its
employees. The most important thing for the company, according to President Yabashi,
is to “find good human resources and educate and train them in an environment in which

10they can experience satisfaction and motivation” (Newsweek’s December 2021). Yabashi
Holdings Co., Ltd. is a small and medium-sized manufacturing company located in Ogaki
City, Gifu Prefecture, Japan. Yabashi Group is a group of 16 human exploring
corporations consisting of nine companies in Japan and seven companies abroad.
Yabashi Forestry Co., Ltd. is a subsidiary within the corporation that manufactures precut lumber for the construction of manufacturing plants (Figure 8). GKC was applied ina project executed by this subsidiary company.

Figure 8 – Yabashi Forestry Co., Ltd. manufacturing pre-cut lumber for construction
Source: Yabashi Holdings Co., Ltd. Hp

5.2 Cost ProjectIn the fall of 2019, one of the authors was asked by President Yabashi for support insolving the company’s problems. His issue was that the “cost visualization system” is not
sufficient, and is difficult to manage when an abnormality occurs. One of the authors of
this study proposed that, “it is necessary to visualize the ‘flow’ of the company including
the Gemba, identify issues, and apply Kaizen.” Moreover, a proposal was also made topromote the visualization of accounting in parallel with Kaizen activities. The “CostProject” was thus established with the concept “Re-construction of Yabashi-style costmanagement.” Figure 9 shows the project policies formulated during the activity’s kickoff.

Figure 9 – Kick-off of Yabashi “Cost Project”
Source: Yabashi Holdings Co. Ltd.

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The factory staff have been enthusiastic about Kaizen activities for a long time. Since
2020, they have been developing “Gemba Improvement Project” under the guidance ofOJT Solutions, a consolidated subsidiary of Toyota Motor Corporation. For the“Accounting Visualization Project”, two accounting researchers, in addition to theauthors, also participated in some of the accounting research activities.
In Phase 1, a factory value stream map was created under the guidance of OJTSolutions. At the same time, the actual situation of cost control within the company wasinvestigated. Even amid the COVID-19 pandemic in 2020, this project continued despite
interruptions. In Phase 2, a “cost table for customer residence” was created using Gemba
data. The table summarizes the costs and profits in one row for each customer's residence
as soon as one product unit was completed. Based on this table, Gemba managers andaccounting staff can have an open exchange of opinions, which means they have createdthe basic tools for lean companies, which are fully utilized in Phase 3.
One of the Kaizen effects is the “frequent stoppage of cutting machine,” which is theresult of many complications. Therefore, the following procedures were carried out basedon the concept of Kaizen:
 Improved the jig to ensure the "hit" of the material to the tip of the stopper
required for clamp operation.
 Adjusted the angle deviation when adding materials.
 Improved material guide to prevent material from hitting the clamp.
 Matched the level of the transport roller and the slit.
The Kaizen process started in July 2021, and the number of outages began to decrease
after August 2021. Since a 30-second stoppage is counted as one stop, there had been 0
stops after February 2022 (Figure 10).

Figure 10 – Frequent stoppage time
Source: Yabashi Holdings Co. Ltd.

The Kaizen effect was calculated using data from the cost table for customer residence.
Due to the decrease in frequent stoppage for one year from April 2021 to March 2022,
the resulting amount of nearly 50,000 yen per month was calculated. However, again,using the same table, the reduction in direct labor costs was 10 times this amount. This12

means that there are other forms of sleeping capacities, but it is assumed that they havebeen improved through, for example, the reduction of waiting time or non-value-added
time.
Before starting the Cost Project, President Yabashi knew that the company had no
mechanism to see the costs through. Even when there was an abnormality in the cost, it
could not be managed. Now, if the Gemba Improvement Project produces Kaizen results,
the Accounting Visualization Project can measure the effects numerically.
6. FINDINGSIn this study, we reviewed past and current accounting challenges through the GKC,
which is an accounting method we developed to measure the amount of production
capacity increase and opportunity loss creation as a Kaizen effects based on an actual
costing process. We aimed to utilize GKC to facilitate the lean journey of an organizationfrom the outset and integrate the foundations of the lean concept in a faithful and detailed
manner.
Yabashi Holdings Co., Ltd.’s Cost Project comprises a Gemba Improvement Project
centered on Gemba Kaizen activities and an Accounting Visualization Project being
promoted in parallel. In the Accounting Visualization Project, a new cost, profit, and loss
management tool called the “cost table by customer residence” was developed. A major
feature of this tool is that it can calculate the cost and profit by residence based on time
data acquired using a tablet for each processing unit at the production site. In addition,
this tool makes it possible to measure the Kaizen effects achieved by the Gemba
Improvement Project as a monthly financial effect.
7. CONTRIBUTION AND OPEN ISSUESThis research presents GKC as a new accounting theory that supports Kaizen. One of
the key concepts of GKC is to create “Free Capacity” through Kaizen, measure it using
accounting principles, and utilize it through new innovations. Based on the GKC theory,an action research case on the Yabashi Group was demonstrated. Currently, the Yabashi
Group is beginning to pursue the GKC approach with its ongoing Cost Project.
ACKNOWLEDGMENTS
This study was carried out in collaboration with Yabashi Holdings Co., Ltd. We would
like to thank President Yabashi and everyone else involved in the company's project. We
would also like to acknowledge Editage for providing us with their English language
editing services.
CONFLICTS OF INTEREST
The authors declare no conflicts of interest.

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