Toyota Motor Corporation: Target Costing System
197-031
Cost Planning
Cost planning at Toyota worked to reduce product costs at the design stage. Toyota first set its cost planning goals and then set out to achieve those goals through aggressive design changes. To correctly assess the gains made, the exact amount of cost reduction achieved through design changes was estimated after excluding all other factors that affected costs, such as increases in material and labor prices. The measurement process started with cost tables that helped engineers estimate the current cost of existing models. These cost tables were kept up-to-date for changes in material prices, labor rates, and production volume levels. The updated production volumes helped determine both depreciation and overhead charges that would be allocated to the new model. Comparison of this estimated cost to the vehicle’s target cost gave the desired level of savings, or cost-planning goal, as it was called. At the profit-estimation stage, also referred to as the "target cost-setting stage,” Toyota calculated the differences between the costs of the new and current models, distributed the appropriate portion of the cost-reduction goal to the design divisions, and then assessed the results. Profit targets for the life of the new model were also calculated as differences between estimates and targets. This process constituted the essence of budget control at Toyota. Toyota clearly specified cost reduction goals for each control unit to ensure that the company’s overall goals were attained. Toyota invented its target costing approach in 1959. Although many major manufacturers in Japan use target costing, Toyota’s system is the oldest and considered by many the most technically advanced. While the idea of systematic cost reduction had existed at Toyota since it was founded, the process was first codified in the mid-1960s, when the firm set itself the objective of producing a $1,000 car. Existing cost estimation played a role in target costing, but there are differences between the two. First, cost estimates relied upon existing standards while target costs were adjusted for any future savings due to design changes. Second, cost estimates had a horizon of six months while the horizon for target costs was the time remaining until the launch of the new product. Target costing brought the target cost and the estimated cost of a product into line by better specification and design. Toyota’s target costing system was designed not simply to estimate the cost of new products but to enable a product to attain its profit targets throughout its life. Toyota used two broad categories of product development, one for completely new types of automobiles and the other for changes to existing models. The development of an entirely new model, such as the Lexus, was relatively unusual. Most of the product development projects focused on modifications to existing models. Japanese passenger cars usually underwent major model changes every four years. However, recent industry trends suggested that the period between full model changes may become longer in the future. The firm used target costing primarily to support model changes, though the same general cost control procedures were applied to the design of entirely new vehicles. Cost estimates for new vehicles involved a greater degree of uncertainty than for model changes. Target Costing Product Planning
3
Made with FlippingBook - Online catalogs