Managerial Accounting and Control - II

A REPORT ON

Toyota Motor Corporation: Target Costing System

Submitted to

Prof.Raghupathy, MB

Submitted By: Group 3 Section: F Date of Submission: 16/12/2012 Name Roll Number Pramit Pal 2012PGP266 Kumar Vibhore 2012PGP179 RawalVritika Bharat 2012PGP303 NiyatiJhunjhunwala 2012PGP234

Flow Diagram of activities involved in target costing technique Determine Customer Wants and Price Sensitivity

Develop a product that satisfies customer needs

Choose a target price

Derive target cost/unit = target price - target operating income/unit

Perform cost analysis

Perform value engineering to achieve target cost

Choose a target price The target price is estimated at the design project stage on the basis of current prices of companies models, competitor pricing and the perceived value to the customer and the price they are willing to pay for it At Toyota, the selling price of a new car model was composed of the selling price of the equivalent existing model plus any incremental value due to improved functionality as perceived by the customers The cost of the incremental feature was easy to determine as most features were already into existence in some car model In case the feature was entirely new, the price addition was determined by how much the customers were willing to pay for the new feature Also the price of features was not always equal to stand-alone price but was influenced by the firms strategy and competitors pricing strategies The exact functionality and actual selling price were fixed just before the product launch which took place much after the target unit price was decided in order to reduce the uncertainty faced by the firm

Perform Value Engineering to achieve target cost Value engineering is a systematic method to improve the value of goods and services by using an examination of functions. Value is the ratio of function to cost. Value can therefore be increased by improving the function or reducing the cost. Value engineering begins after cost planning goals are distributed to the design engineers High performance, high quality product creation is designers top priority Each design division provided individual cost reduction goals First performance checks on test parts are completed Discussion initiated to reduce costs on following areas o Material specifications and consumption o Yield o Number of parts o Ease of work o Man-hours Specific design changes made based on cost analysis Members of cost planning and accounting worked closely with design engineers to gauge cost changes

In this way, value engineering ensures that division specific cost targets are met before design goes for mass production.