Toyota Motor Corporation: Target Costing System
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desired level of profitability. Similarly, the actual selling price was not fixed until just before product launch. Delaying these two critical decisions reduced significantly the uncertainty faced by the firm. For example, suppose the incremental value assigned to an air bag in the US market was $450 but the competition had set it at $700. In this case, Toyota might increase its price by the difference. Similarly, if the competitive prices were lower, Toyota would drop its prices to match. The sales division proposed anticipated production volumes based upon past sales levels, market trends, and competitors’ product offerings. The sales division typically proposed a figure that was considered safe (i.e., achievable), based upon the model's current sales level. Optimism was restrained in favor of realistic goals. Assisted by engineers in the design, test-production, and technical divisions, a chief engineer drafted the development plan for the new model and then led the development project. Well over a hundred engineers from the various divisions worked with a chief engineer on a typical project, but since they belonged to different divisions, probably only about a dozen people reported directly to the chief engineer. In this sense, the chief engineer was more a project leader than a supervisor of product development. The chief engineer coordinated the design process at the design divisions, which were relatively autonomous; the chief engineer was expected to develop a “concept” for the new vehicle that spanned multiple design divisions. Toyota considered the tensions created by this matrix approach beneficial to the creative design process and worth any conflict that might arise. Development Plan
Cost Planning
Toyota set the cost-planning goal based upon the product plan and the targets for the product's retail price and production volume. Because an estimated price had been established, the cost-planning goal was equivalent to the product's target profit: the expected profit from product sales over its production life (usually, four years). The product's target cost was the unit cost upon which the profit target was based.
Calculating Target Profit and Target Cost
Toyota calculated the lifetime target profit for a product, such as the Celica, by multiplying the target sales volume by the model's return on sales (or, as it was known at Toyota, profit ratio of sales). Toyota set the sales profit ratio with reference to the corporation's long-term target profit ratio. Estimated cost was determined from the firm's cost tables. Estimated profit was calculated using this figure. Estimated profit was less than the target profit because the target cost included the estimated cost savings due to value engineering and other cost reduction activities. The difference between target and estimated profit was the amount to be cut from costs through cost planning. The cost-planning goal was obtained by subtracting the estimated total profits from the target profits. The goal of cost planning was to determine the unit profit needed to achieve the profit target, and thus the amount to be trimmed from the new product's cost through cost planning activities. Estimated profit equaled the retail price minus the estimated cost per unit times the production volume. As cost reduction activities were implemented, the product's estimated costs decreased. If the goal was achieved, the target cost and expected cost became equal, as did the expected and target profits.
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