full version Target Costing Essay

Target Costing

Category: Business

Autor: lut93 13 May 2011

Words: 649 | Pages: 3

Target costing concept was invented by Toyota in1965 and the main effort is to reduce cost from beginning design stage. Toyota implement Kaizen or continuous reduce cost. Target costing concept is implemented or forecasted from the beginning stage of designing car. Main difference Toyota used these information to control cost whereas in Europe cost information is used in making decisions.
Toyota makes changes in new model in every 3-4 years. It has its own unique way of calculating target cost, target profit based on production volume, market price and their target selling price. Toyota costing only influence with cost changes derived from production and not from other external influence.
Examples Methods of Calculating Target Costing at Toyota
1. To earn new target profit for their new model is to calculate the difference between the new and current models.

2. Formula to get new price for the new model ;
New Price = Existing model + ( f1 + f2 + f3) f = value of added function

3. Cost planning -> Based on product plan, retail price and production volume.

4. Calculating target profit
Sales target = Target retail price + target production volume over product life

5. Calculating estimated profit
Estimated profit = ( Target retail price – estimated cost ) target production volume
Estimating differential costs
Normal technique – Add all the cost for new model
Toyota technique – Sum the differences between new and current model
Estimated cost = cost of current model + ( m1+m2+m3….)
m1, m2, m3 ….. = changes in cost due to design change

Equipment Investment and Depreciation

A new model change require large investment in equipment. For this reason, an outline of equipment of investment is often provided at the product planning stage. Equipment investment can be divided roughly into two categories:
1. Investment in equipment to replace metal molds
2. Investment to add, expand and improve other equipments and facilities.

Promoting Cost Planning
Cost planning – Purpose is to determine which cost can be reduced through better design of the new model. Each division is given cost planning goal ( percentage ) how much target to reduce. The Chief Engineer will distribute the cost target based on previous model and experience.

Design Policy and Cost
There are more opportunities to reduce cost in product planning stage rather than actual development. For example in Celica line, there are 3 sister models sharing the same engine and chasis which are Toyota Celica, Toyota Corona Exsiv and Toyota Carina ED.
Different between the three models is the finishing, parts and accessories. These 3 different models have its own markets for different continent sales in Asia and Europe. Thus Toyota must design in such way these 3 models used shared the same parts and hence enabling mass production of parts and resulted in reduced cost.
Value engineering
After all the above stage completed, comes the value engineering process. Value engineering theory is to produce high quality, high performance product that satisfies customer at the same time must attain their cost targets.
The areas the value engineering tackles are material specifications, consumption, yield, number of parts, ease of works and man hours.
From Cost Planning to Mass Production
After all the planning done, it is important to follow up in mass production. But sometimes these costs change during mass production stage depending on line conditions and capacity. For example during planning stage if the production is producing in below capacity, it is the responsibility of production team to fully utilize the line capacity.
Once the line is chosen based on these criteria, the standard cost is calculated. The production division then begins its effort to maintain or even improve on the standard cost.
This brief discussion on Toyota cost planning emphasizing on continuous reduces cost from design stage, product planning, cost planning and design policy. It is an integrated TQM ( total quality management ) that blended together using Kaizen recipes.
With all the cost control concept illustrated plus backed with excellent production control represented by just in time manufacturing makes Toyota remarkably efficient.