Toyota Motor Corporation: Target Costing System
197-031
Toyota divided equipment investment into two categories:
1. Investments in equipment needed to replace metal molds; and
2. Investments to add, expand, or improve other equipment and facilities.
When a new part or system was added (e.g., four-wheel steering), production lines were built to manufacture them. When production methods altered because of a model change, the lines were updated. If a plant did not have enough capacity to make the new model, expansion was necessary. Many automobile parts (e.g., presswork, sheet metal, plastics, and castings) were made using metal molds. A model change required alterations in many body and interior parts, forcing the firm to acquire new metal molds for those parts whether they were manufactured in-house or by part suppliers. These molds were costly to manufacture. Since they were integral parts of the production machinery, they were considered production equipment. The production-technology division developed the equipment-investment budget. Some figures in the budget were not always accepted outright and required modification. The investment budget might be reduced if the reviewing committee believed that more efficient use of common facilities was possible or that the same level of productivity could be achieved with less expensive machinery. Finally, the accounting division produced an adjusted plan based on the budget proposed by the production-technology division. This plan took into consideration the influence on cost of the new model and the balance between the budget and the company's total equipment investment.
Promoting Cost Planning
Cost planning determined the amount by which costs could be reduced through better design of the new model. Each division involved in the model’s design was given a particular cost reduction target. For example, the divisions in charge of design of the engine, body, chassis, drive train, electronics, and interior were all given different cost reduction targets.
Distributing Cost Targets
Toyota management believed that it was impossible to attain a target cost by simply legislating a uniform reduction of costs for all divisions. Consequently, the chief engineer distributed a portion of the goal to each design division based on precedent and experience. Discussion continued with each division until both the division and the chief engineer were satisfied with the amount distributed. The chief engineer decided where cost reduction should occur. For example, if the chief engineer wanted a quieter car or a higher performance engine, he or she would lower the cost reductions of design divisions responsible for those aspects and increase the expected reductions from other divisions. The cost reduction targets were first assigned to the design divisions and then for certain major parts to the part level. For example, if one of the design changes was to increase engine power by 10hp, the engine division might estimate that the improvement would increase the cost of the engine by - X. The chief engineer would use the precedents for upgrading engines by 10hp to estimate a more aggressive cost and then ask the division to compromise on - Y. In contrast, another division might be asked to reduce costs because the new part would be smaller or lighter than the old one. Finally, a third division might be asked to maintain the same cost, despite a change in materials, because no change in performance was anticipated.
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