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Toyota Target Costing

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There are numerous differences between management practices in Western companies and companies in Japan. One of the main differences is related to cost reduction. A manager in Europe or the United States generally expects to use cost information to make decisions about pricing and investments, while a Japanese manager expects to use cost information to control costs. Toyota uses cost planning to generally reduce costs at the design stage. By using this technique, Toyota sets goals for cost reduction, and then tries to achieve these new targets through design changes that will accomplish the cost reduction goal. Toyota goes through a vigorous testing phase to judge the costs of the new design in comparison with the old one, in order to guarantee a cost reduction after implementation of the new technique. This is the main idea that Toyota uses to achieve their company-wide goals.

The question still is, what is target costing? Target costing is an attempt at the planning and development phase, of a product life cycle, to attain a specified cost that is decided on by management. This technique is different from cost elimination in that it seeks to lower costs by designing a quality product that reduces costs in the production phase. Target costing is defined as a companywide profit management activity during the new product development stage that includes: (1) planning products that have customer-pleasing quality, (2) determining target costs (including target investment costs) for the new product to yield the target profit required over the medium to long term given the current market conditions, and (3) devising ways to make the product design achieve target costs while also satisfying customer needs for quality and prompt delivery. Target costing was invented by Toyota in 1965.

Better Product Planning and Development
More opportunities for cost reduction exist in product planning and development as compared to production.

Product Planning
This article focuses on the changes made to existing automobiles and not the design of new ones. There are several steps in the sequence of price, production, and cost decisions. Toyota first decides what the new retail price of the automobile is going to be by taking the old price and adding the value of any new functions. The sales division comes up with the suggested production volume, by taking past numbers and indexing them to market trends and the state of competitors. After all these figures have been set, the focus switches to cost planning. This cost plan is based on the product plan and the targets for retail price and production volume. Toyota establishes a profit target that is subtracted to determine their target cost. These cost planning decisions are made three years before they release the model. Tanaka includes the algebraic explanations of how the cost-planning numbers are derived. Estimating Differential Costs

When Toyota estimates the approximate costs of a new model it does not simply add up all the costs of the upgraded model, but instead it sums the cost variations of the new model and the old one. Toyota finds this technique to be very beneficial, because it tends to be less work and provides more accurate results. In addition it helps the specific divisions comprehend the cost fluctuations. By using this technique Toyota removes variable costs both models incur, such as wages and indirect costs, and then they can base their decisions only on costs that change between the two models in relation to design and production volume.

Equipment Investment and Depreciation
A full model change requires a large investment in equipment. The production-technology division makes the equipment –investment plan which is then adjusted by the accounting division by taking into consideration the influence on the cost of the new model.

Promoting Cost Planning
The purpose of cost planning is to determine the amount by which costs can be reduced through better design of the new model. Cost reduction targets are not rationed off to the appropriate divisions by using a standard percentage to spread the reduction evenly over the entire process, but instead the reduction is efficiently passed to each division based on their capability. This capability is determined by the cost manager meeting with each division manager to agree on an appropriate cost reduction for that specific division, and then it is the responsibility of each division to carry-out those reductions their own way.

Value Engineering
Value engineering starts with performance checks on the test parts. Designs are changed to give the parts a specific degree of performance, neither more nor less. Then discussion turns to possible ways to cut costs while maintaining performance.

From Cost Planning to Mass Production
Cost planning is effectively finished when the project goes to the mass-production stage. Follow-up studies are done for a year after start-up to ensure that mass production is going forward at the planned cost.

Cost Planning and Standard Costing
In cost planning, costs are estimated from the cost tables as the sum of the differences between the current and the new models. Standard cost at the mass-production stage changes depending on specific production line conditions.

The main point in this article is to show how cost planning at Toyota is focused on the design phase. Toyota does this by setting goals for cost reductions through design changes solely, excluding all other factors. Toyota takes these goals and then assesses them to different divisions, to make the necessary changes. Toyota believes that by changing product design and production design to produce lower priced and more efficient products, they will achieve a higher level of profitability.

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