Target Costing
According to Bernal et al (2009) target costing is a cost management strategy developed by Toyota and asks the question,” How much could a service that satisfies the clients wishes cost?”. It is primarily a technique for profit management and its objective is to ensure that future products generate sufficient profits to enable the firm to achieve its long-term profit plans (Cooper, 1997, 1). It uses the principle that a product’s price is developed based on what the market is willing to pay for it, not on what it actually costs to produce the product (Modarress et al, 2005, 2). Under the scope of Target Costing, the design of a related-to-costs-and-clients service takes place, (Bernal, 2009, 3).
The cost management measure is used in areas that are faced with constantly growing competition and where the products have short life cycles. It thus helps an organisation sustain its existence in the market and be able to effectively respond to the markets demands and requests. It considers factors such as the price, customers, design of the product, the cross functional and chain involvement of the product as well as its life cycle. Target costing for a product is calculated by subtracting a company’s desired profit from the anticipated selling price.
Advantages of target costing include delivering the optimal value proposition to end customers, minimizing product-line complexity, selecting appropriate product and process technologies, lowering product design late in the innovation process and eliminating cost overruns. The technique ill also orient the organisation towards customers and will foster partnerships with customers.
Despite having the positive side of it, the technique has so drawbacks. There would be possible misuse of the technique for example producers would use it to squeeze the profit margins of suppliers, thereby getting materials at the lowest cost possible. The technique is also stressful to use in company because it has a large process which involves development of a detailed cist data. The product development time would also be lengthy in cases such as the product being redesigned in order to bring its cost down below the company’s target. It would also result into production of low quality as a result of use of cheap inputs.
Toyota Motor Corporation
Toyota is a multinational automobile manufacturing corporation with its headquarters in Japan. It is the largest motor manufacturer by sales and production. Founded in 1934, the company has grown wider and wider and has taken up slogans such as, “The car in front of you is always a Toyota”. It has extraordinary sales worldwide and the company is always coming up with new models or modifying the old makes.
Toyota implements the target costing technique by normalizing the production costs to the existing conditions. At this stage it incorporates changes in prices due to factors such as inflation. The company then selects the price for the base product, the volume they expect to sell and the profits likely to be commanded. They then identify the cost reductions that they need so that they can be able to achieve the profit targets. Finally they allocate the cost reduction techniques to the different departments as they bare best suited.
The company use the technique at the design stage of a product to ensure that they realize the concept of a new or modified car. They need to ensure that the car will be market viable and that they will get a return for their money. The company would produce cars and the sales would be low and thus they needed to find a way to improve them at all cost. They had no good understanding of their customers and they thus came up with ways to get to know them and thus lead to high sales.
Sony Company Corporation
Sony is a multinational company concerned with electronics and has operating sectors such as electronics, games, entertainment, financial services among others. It was founded in 1046 and has its headquarters in Minato, Tokyo, Japan. The corporation has six business operations. They are Sony Corporation (Sony Electronics in the U.S.), Sony Pictures Entertainment, Sony Computer Entertainment, Sony BMG Music Entertainment, Sony Ericsson and Sony Financial Holdings.
The corporations target costing has five stages. They are target price setting, target margin setting by use of interactive process and trying to meet division in long term profit objective, target cost setting whose target cost is equal to target price minus target margin, and lastly determines whether group target is met or not. If group target is met, it will go to the final stage which is final decision making. If it is not met, the teams responsible have to come up with new alternatives that would help reduce production costs and at the same time increase the corporation’s operation to increase their profitability. The techniques profit target is based on a product being replaced during the target price setting stage.
The company used the target costing approach to enable it project its costs since they were experiencing low or no returns and thus they seriously needed to find a way to resolve the problem. They also wanted to come up with new products such as colour televisions for example. The company therefore had to know what they will find in the market, whether the products will be accepted or if they were due to fail. The company had production problems which lead to products that were no in good working conditions. They thus needed to ensure that the production process was profitable at all time.
Comparison
Between the two companies, Toyotas target costing is better since the company it is more flexible and can be used in any product in the company. Sony’s model was designed for specific products. The model also has a stronger cross functional interaction. It considers factors affecting the market such as inflation and this will ensure higher intelligence and effectiveness of the system. Both of the companies will experience an increased profit level given good implementation of the techniques.
Thoughts and Criticisms
A customer is the key to the success of an organisation. I credit the target costing techniques since it considers the customers and take into account their needs and wants of the customers. Thus it will ensure the satisfaction of the customers and will lead to repeat purchases which will translate into increased incomes and profits to the company. I can also commend the technique for enhancing the working environment in a company by enhancing the employee and departmental relationships. This will result into high productivity and quality products. An organisation would also enhance external relationships with other stakeholders such as suppliers. It also saves the company time and money in terms marketing their products. This is because the products are modelled for the customers needs and thus they will sell themselves. The technique is expensive since it requires detailed data and involves also of costs in obtaining it. The company also needs to have cooperative and trustworthy employees will do the work well and present data as they get it and also because the whole process will involve having a lot of meetings. Finally the technique may undermine the companies image as it call for large reduction in costs and may lead to the company using low quality inputs thus bad output and would result to loss of customers.
Kaizen Costing
Kaizen costing activities focus on continual small incremental product cost improvements in the manufacturing phase, as opposed to improvements in the design and development phase of a product (Modarress et al, 2005, 3). According to Budugan and Georgescu (2009) Kaizen costing is the maintenance of present cost levels for products currently being manufactured via systematic efforts to achieve the desired cost level. It is the cost at which products must be manufactured and is concerned with reducing the costs of existing products and processes in the manufacturing stages. Kaizen means continuous and gradual development by use of small but advantageous activities as opposed to large or gradual improvement made through innovation or large investments in technology. It has four key principles which are price lead costing, cross functional teams, focus on customer, product and process design and finally life cycle cost.
Kaizen costing is advantageous because it focuses on the customer and is a continuous improvement process. It also acknowledges the problem openly and promotes openness. The employees therefore are always informed. The technique also involves development of work teams which will enable good collaborative energy and will thus lead to good results. The use of cross functional skills will also lead to good results as a result of having different people with different skills working on the same thing. The technique also uses the right relationship process that ensures a good and harmonious mixture of processes in the company. The technique also leads to development of self discipline in an individual. The technique always ensures good results such reduction of waste in most of the manufacturing processes since it improves space utilization, product quality, the use of capital, a company’s communication, its production capacity and employee retention.
The technique has its advantages. It takes longer since the process is gradual and focuses on small parts of the business. It also relies on small ideas and lacks a strong direction and focus and therefore the process is more likely to fail. Measurable improvements at a given stage may be very small thus requires long term perspectives so that to see any changes that may have occur or are expected to occur.
Coca-Cola Bottling Indonesia
It is a manufacturing company responsible for production and manufacture of beverage bottles. It is located in Indonesia Central Sumatra. They sell, distribute and merchandise Coca-Cola Company’s products to retail stores, vending machines, restaurants and food service distributors in the region
The company came up with a chart identifying the problems in the order of their severity and this is determined by grading them after looking into them and evaluating them. With this, it could now make the product and process changes to ensure it got rid of the problems. An assessment of the change was made to ensure that it meets the target costs. Time for the technique to take effect was determined followed by production using the new ways. In the process, minor product changes were made and got rid of the problem gradually.
The company used the technique because they wanted to reduce the costs that were incurred as a result of rejected products that were unfit for taking into the market. A rejected product is defined as a product that does not meet the quality standard, packaging and taste and therefore is not good for use or being marketed (Utari, 2011, 8). The company also wanted to get rid of problems in the production process that lead to the production of unfit products. Factors such as machine, human effort, production method and materials were considered. The company thus sought out to use kaizen costing to solve theses problems.
Daihatsu Motor Company
It a car manufacturing company and is characterized by manufacturing of small models of cars mostly off road vehicles. Its headquarters are Ikeda, Osaka Prefecture. It was formed in 1951 and by 1960 had already widened its market to Europe. It is one of the oldest Japanese manufacturers of cars and is known for its production of electric cars.
For the company, the standard cost for the next year is usually the cost achieved at the end of the previous year. This will thus enable calculations through extrapolation basing this on their sales objectives and on their budgeted margins. These budgeted margins determine the company’s expected reduction of the variable costs. Some of the margins define the estimated fixed costs which will enable the calculation of the budgeted profit. For new products, the technique is used after a period of time so that the effect of the product on the market can be felt and thus the learning process becomes easier.
They used target costing for the sole purpose of motivating the operators to reduce costs during the products planning and design stages. If the company reduced these costs, they would experience higher returns and would also reduce the gaps brought about by losses. They also wanted to curb problems with their productions. Most of the vehicles were produced with a lot of defects and thus it lead to losses to the company. They need to come up with gradual correction stages that would ensure proper production. The company would also use the technique for the purpose of widening its sales all aver the world since the brand is not well known.
Comparison
Both of the companies are future oriented since they are both characterised by reflection or speculation of the future in terms of sale, returns, profits and their productions. Daihatsu sets its goals by use of the previous year’s returns and thus it strives to meet this target. Indonesian Coca-Cola bottling company develops a chart which acts as a plan for achievement of their goals.
Thoughts and Criticisms
The technique is no that bad since the achievement of the companies objectives will be met gradually. This will also give the company enough time when implementing the technique since it involves concentration on small part of the business according to their importance. This will allow effective and efficient result that will enable the company to grow as well as exist in the market. The results of the technique are not visible fast but they are clearly thought of and thus will assure the company of a position in the market characterised by high returns to the business. The model is also conservative in nature since in most cases it allows for reductions in space and wastage in the organisations. It also enhances the products public image as a result of improved and high quality of product and services and also enhances communication of the company with the customers. The techniques improvements cannot be measured at an early stage since it takes a lot of time for hem to be evident. There is also no clear set deadline of the technique and therefore it may run for a long time before the expectations of the company are met. It would also result in dissatisfaction of the employees and customers given no immediate measurable change. Finally the costs for implementation of the techniques are no high and thus it is good.
References
Cooper R., (1997), Factors Influencing the Target Costing Process: Lessons From Japanese Practice
Utari W., (2011), Application of Kaizen Costing as a Tool of Efficiency in Cost of Production at PT. Coca Cola Bottling Indonesia
Bernal L., Dornberger U., Suvelza A., Torres O., Byrnes T., (2009), Target Costing for Services
Modarress B., Ansari A., and Lockwood D. L., (2005), Kaizen Costing for Lean Manufacturing: A Case Study
Fischer T. M., Schmitz J. A., (1998), Control Measures for Kaizen Costing -Formulation and Practical Use of the Half-Life Model
The society of Management Accountants of Canada, (1994) Implementing Target Costing,
Monden, Y. and Lee J. Y., (1993), How a Japanese auto maker reduces costs. Management Accounting
Budugan D., Georgescu J., (2009), Cost Reduction by using Budgeting via the Kaizen Method
