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1942107AFM2
1942107AFM2
In preparation of my assignment of AFM I would like to show my gratitude to some respective people
who helped directly or indirectly in completion of my work.
Firstly I would like to thanks my parent for giving encouragement and invaluable assistance to me
without which it would have not been possible to complete my assignment.
Secondly I would like to show my gratitude to my AFM professor DR. LIAQAT ALI for assigning
such topic so that I could discover new ideas and build my knowledge more. By doing this assignment
I got enriched with many information which can help me in future.
CONTENT
TARGET COSTING is a system under which a company plans in advance for the price points,
product costs, and margins that it wants to achieve for a new product. If it cannot manufacture a
product at these planned levels, then it cancels the design project entirely. With target costing, a
management team has a powerful tool for continually monitoring products from the moment they
enter the design phase and onward throughout their product life cycles. It is considered one of the
most important tools for achieving consistent profitability in a manufacturing environment
DEFINITION :- Target costing is defined as "a disciplined process for determining and achieving a
full-stream cost at which a proposed product with specified functionality, performance, and quality must
be produced in order to generate the desired profitability at the product’s anticipated selling price over a
specified period of time in the future.’ This definition encompasses the principal concepts: products
should be based on an accurate assessment of the wants and needs of customers in different market
segments, and cost targets should be what result after a sustainable profit margin is subtracted from what
customers are willing to pay at the time of product introduction and afterwards.
The fundamental objective of target costing is to manage the business to be profitable in a highly
competitive marketplace. In effect, target costing is a proactive cost planning, cost management,
and cost reduction practice whereby costs are planned and managed out of a product and business early
in the design and development cycle, rather than during the later stages of product development and
production.
The process of target costing can be divided into three sections: the first section involves in market-
driven target costing, which focuses on studying market conditions to identify a product’s allowable cost
in order to meet the company’s long-term profit at expected selling price; the second section involves
performing cost reduction strategies with the product designer’s effort and creativity to identify the
product-level target cost; the third section is component-level target cost which decomposes the
production cost to functional and component levels to transmit cost responsibility to suppliers
1) Market-driven target costing
Market driven target costing is the first section in the target costing process which focuses on studying
market conditions and determining the company’s profit margin in order to identify the allowable cost of
a product. Market driven costing can go through 5 steps including: establish company’s long-term sales
and profit objective; develop the mix of products; identify target selling price for each product; identify
profit margin for each product; and calculate allowable cost of each product.
Company’s long-term sales and profit objectives are developed from an extensive analysis of relevant
information relating to customers, market and products. Only realistic plans are accepted to proceed to
the next step. Product mix is designed carefully to ensure that it satisfies many customers, but also does
not contain too many products to confuse customers. Company may use simulation to explore the impact
of overall profit objective to different product mixes and determine the most feasible product mix.
Target selling price, target profit margin and allowable cost are identified for each product. Target
selling price need to consider to the expected market condition at the time launching the product.
Internal factors such as product’s functionality and profit objective, and external factors such as
company’s image or expected price of competitive products will influence target selling price.
Company’s long-term profit plan and life-cycle cost are considered when determining target profit
margin. Firms might set up target profit margin based on either actual profit margin of previous products
or target profit margin of product line. Simulation for overall group profitability can help to make sure
achieving group target. Subtracting target profit margin from target selling price results in allowable cost
for each product. Allowable cost is the cost that can spend on the product to ensure meeting profit target
if selling it at target price. It is the signal about the magnitude of cost saving that team need to achieve.
3) Engineer the product. The engineers and procurement personnel on the team now take the
leading role in creating the product. The procurement staff is particularl y important if the
product has a high proportion of purchased parts; they must determine component pricing
based on the necessary quality, delivery, and quantity levels expected for the product. They
may also be involved in outsourcing parts, if this results in lower costs. The engineers must
design the product to meet the cost target, which will likely include a number of design
iterations to see which combination of revised features and design considerations results in
the lowest cost.
4) Ongoing activities. Once a product design is finalized and approved, the team is
reconstituted to include fewer designers and more industrial engineers. The team now enters
into a new phase of reducing production costs, which continues for the life of the product.
For example, cost reductions may come from waste reductions in production (known as
kaizen costing), or from planned supplier cost reductions. These ongoing cost reductions
yield enough additional gross margins for the company to further reduce the price of the
product over time, in response to increases in the level of competition.
Target costing is most applicable to companies that compete by continually issuing a stream of new
or upgraded products into the marketplace (such as consumer goods). For them, target costing is a
key survival tool. Conversely, target costing is less necessary for those companies that have a small
number of legacy products that require minimal updates, and for which long-term profitability is
more closely associated with market penetration and geographical coverage (such as soft drinks).
The target costing concept has limited application in a services business where labor comprises the
primary cost.
Target costing is an excellent tool for planning a suite of products that have high levels of
profitability. This is opposed to the much more common approach of creating a product that is based
on the engineering department’s view of what the product should be like, and then struggling with
costs that are too high in comparison to the market price.
INTRODUCTION
Toyota Motor Corporation is a Japanese multinational automotive manufacturer headquartered
in Toyota, Aichi, Japan. In 2017, Toyota's corporate structure consisted of 364,445 employees
worldwide and, as of September 2018, was the sixth-largest company in the world by revenue. As of
2017, Toyota is the largest automotive manufacturer.
Toyota was the world's first automobile manufacturer to produce more than 10 million vehicles per year
which it has done since 2012, when it also reported the production of its 200-millionth vehicle.[ As of
July 2014, Toyota was the largest listed company in Japan by market capitalization and by revenue.
The company was founded by Kiichiro Toyoda in 1937, as a spinoff from his father's company Toyota
Industries to create automobiles. Three years earlier, in 1934, while still a department of Toyota
Industries, it created its first product, the Type A engine, and its first passenger car in 1936, the Toyota
AA. Toyota Motor Corporation produces vehicles under five brands, including the Toyota
brand, Hino, Lexus, Ranz, and Daihatsu. It also holds a 16.66% stake in Subaru Corporation, a 5.9%
stake in Isuzu, a 5.5% stake in Mazda, as well as joint-ventures with two in China (GAC
Toyota and Sichuan FAW Toyota Motor), one in India (Toyota Kirloskar), one in the Czech
Republic (TPCA), along with several "nonautomotive" companies. TMC is part of the Toyota Group,
one of the largest conglomerates in Japan.
There are numerous differences between management practices in Western companies and companies in
Japan. One of the main differences is related to cost reduction. Toyota uses cost planning to generally
reduce costs at the design stage. By using this technique, Toyota sets goals for cost reduction, and then
tries to achieve these new targets through design changes that will accomplish the cost reduction goal.
Toyota goes through a vigorous testing phase to judge the costs of the new design in comparison with
the old one, in order to guarantee a cost reduction after implementation of the new technique. This is the
main idea that Toyota uses to achieve their company wide goals.
The question still is, what is target costing? Target costing is an attempt at the planning and development
phase of a product life cycle, to attain a specified cost that is decided on by management. This technique
is different from cost elimination in that it seeks to lower costs by designing a quality product that
reduces costs in the production phase.
Product Planning
This article focuses on the changes made to existing automobiles and not the design of new ones. There
are several steps in the sequence of price, production, and cost decisions. Toyota first decides what the
new retail price of the automobile is going to be by taking the old price and adding the value of any new
functions. The sales division comes up with the suggested production volume, by taking past numbers
and indexing them to market trends and the state of competitors. After all these figures have been set,
the focus switches to cost planning. This cost plan is based on the product plan and the targets for retail
price and production volume. Toyota establishes a profit target that is subtracted to determine their
target cost. These cost planning decisions are made three years before they release the model.
Tanaka includes the algebraic explanations of how the cost-planning numbers are derived. However,
they are not inherently important to the summary of this article.
When Toyota estimates the approximate costs of a new model it does not simply add up all the costs of
the upgraded model, but instead it sums the cost variations of the new model and the old one. Toyota
finds this technique to be very beneficial, because it tends to be less work and provides more accurate
results. In addition it helps the specific divisions comprehend the cost fluctuations. By using this
technique Toyota removes variable costs both models incur, such as wages and indirect costs, and then
they can base their decisions only on costs that change between the two models in relation to design and
production volume.
“The purpose of cost planning is to determine the amount by which costs can be reduced through better
design of the new model.” Cost reduction targets are not rationed off to the appropriate divisions by
using a standard percentage to spread the reduction evenly over the entire process, but instead the
reduction is efficiently passed to each division based on their capability. This capability is determined by
the cost manager meeting with each division manager to agree on an appropriate cost reduction for that
specific division, and then it is the responsibility of each division to carryout those reductions their own
way.
Conclusion
The main point in this article is to show how cost planning at Toyota is focused on the design phase.
Toyota does this by setting goals for cost reductions through design changes solely, excluding all other
factors. Toyota takes these goals and then assesses them to different divisions, to make the necessary
changes. Toyota believes that by changing product design and production design to produce lower
priced and more efficient products, they will achieve a higher level of profitability.
SONY
Company Background
Sony. Like no other. That is the company’s slogan. Sony Corporation is a multinational conglomerate
corporation which headquartered in Minato, Tokyo, Japan. This company is one of the world’s largest
media conglomerates with revenue exceeding US$88.7 billion in year 2008 .
Masaru Ibuka & Akio Morita was the founders of Sony. In 1946, when the company was known as
‘Totsuko’, the two founders were doing their research and manufacture of telecommunications and
measuring equipment with the start-up capital of 190,000 yen only (Wikipedia online).
After that, they had changed the company’s name to Sony, which is combining “sonus” the original
Latin for “sonic,” meaning Greek goddess of sound, with “sonny” symbolizing small size, or youthful
boy simply as the pronunciation of Sony is the same in any language. They adopted the name ‘Sony’ in
1958.
Sony Corporation is the electronics business unit and the parent company of the Sony Group with
primarily focusing on five operating sectors. Those sectors are electronics (such as PlayStation), games,
entertainment (motion pictures and music), financial services and others. Besides that, there are 6
principal business operations in Sony group which 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, operating those stated segments.
Nowadays, Sony has became one of the most comprehensive entertainment companies and also the
leading brand for electronics, videos, communications, video game consoles and information technology
products. Moreover, Sony is the Worldwide Top 20 Semiconductor Sales Leaders (Wikipedia online).
Why Sony?
At the first discussion, we had focus on cell phone companies such as Nokia, Samsung, LG and Sony
Ericson, selecting the target company for this project. After that, we had came to a conclusion that Sony
Ericson is the most preferable among the companies suggested but Sony Corporation is more interesting
and its information is easier to search.
Sony Corporation represents a wide range of business, meanwhile, manages to remain globally unique.
Moreover, it is the parent company of the Sony Group (including Sony Ericson). Therefore, through
searching about this company, we can learn more about Sony and get more knowledges about
managerial techniques.
Managerial Accounting
In the year of 1945, Sony origin name is Tokyo Telecom Research Institute foundation and till the year
of 1946, changed to Tokyo Telecom Engineering Corporation Foundation. This firm produced the Japan
first magnetic tape recorder at 1950. At 1955, firm gets listed on over-the-counter market and at 1958
firm gets listed on Exchange market and changed name to SONY. From 1960 to 1974, Sony starts
internationalization.
SONY target costing system has five stages which are target price setting, target margin setting use
interactive process and try to meet division’s long term profit objective, target cost setting which target
cost is equal to target price minus target margin, and lastly is defined whether group target is met or not.
If group target is met, it will go to the final stage which is final decision making. Yet, if group target
isn’t met, teams have to find out alternatives to reduce production costs and increase process to increase
profitability. Sony’s target costing system is so simple as the price target is set based on product being
replaced during the stage of target price setting. While for target margin, it has to ensure long term
objectives remain stable across several product cycles.
Next, there is always a good baseline for target costs because new products have incremental changes.
Besides, Sony has short product life cycle which is one year and short time-to-market needs. Sony has a
very accurate sales volume estimates which are based on sales of predecessor product, degree of
improvement of the new product over its predecessor, overall market trends and feedback from retailers.
At the end of each product life-cycle, Sony’s inventory is nearly equal to zero as absorption costs and
variable costs would approximately give the same results. Furthermore, even Sony using Absorption
costing, fixed costs wouldn’t be in the inventory more than one year.
Target costing is originated in Japan and used in over 80 percent of Japanese assembly companies and
by 100 percent of Japanese car manufacturers. The dilemma for manufacturers is to match the lower
prices of the global competition with the highest quality products customer demand. Besides, target
costing may serve as a solution when developing new products.
It minimizes costs through the optimal use of all resources along the entire supply chain, involving
suppliers and manufacturers as contributors to the design process. In price-based target costing, a
company sets a target cost through comparison of competitive products. They have to collect data on the
market price and subtract their desired profit margin. This desired profit margin will almost always
greater than the cost of capital.
However, it will influence by macro environmental forces and also shareholder goals. There are many
companies and industries becoming successful after adopting target costing like Sony, Toyota, Nissan,
and Olympus Optical and later added non-Japanese companies such as Mercedes, Goodyear and others.
Moreover, traditional cost systems are always overstate the cost of high-volume, standardized products
and understate the costs of low-volume and customized products. They do not consider the need for the
cost, what drives the cost, or even the process or product’s characteristic or function which are all
necessary.
Consortium for Advanced Manufacturing – International had defined target costing as a set of
management tools that is designed to direct design and planning activities for new products, providing a
basis for controlling subsequent operational phases, and ensure that products achieve given profitability
targets throughout their life cycle (Cf. Shank, 1999). Actually, target costing is focuses more on
customer requirements.
The question suppose is “How much can the product cost?” but not “How much will the product cost?”.
Target costing is a complete cost-reduction program and strategic profit management system. The
process is made up of discrete activities and decisions. It starts with a determination of the product, its
characteristics and qualities, and its optimal selling price.
Then, the product itself will ultimately determine the costs necessary to produce and sell that product.
Butscher and Laker describe this first step as including definition of the target segments, identification
of the competitive advantages and disadvantages, positioning of the new product within the target
segments, fine-tuning the product design and pricing, and market simulations (Butscher et al, 2000).
As mention by CIMA Official Terminology, target costing is a product cost estimate derived by
subtracting a desired profit margin from a competitive market place (CIMA, 2005). Target costing was
developed by Japan’s manufacturing in the early 1970s for the purpose increased automation and
decreased their operation cost, especially labor cost. In target costing, there are some important point
should be memorized by manager to arrive their target costs.
Firstly, managers should determined the estimate costs, there is manager should be identifying the gap
between the target cost and the estimate of the cost of production because this gap gives an estimate of
the excess cost which must be taken out of the new product. After that, managers should identify
alternative ways to close the gap. However, manager should consider how much costs can be removed
from each product based on the value of customers. Managers also can close the gap with negotiation
between different production departments and also with their supplier to arrive at final target costs.
Thirdly, managers should monitor and managed against the target costs by using the usual budgeting and
costing method after target costs have been determined. Besides, target costing is giving the company
some advantages and it become a primary reason why companies were choose target costing as a tool to
plan for the costs of products before they produced it.
Target costing become an analysis which highlights other problems that can reveal more general
managerial problems. Target costing also is a driver for cost improvement as a way to integrate the use
of other tools, for instance JIT. Lastly, target costing may help companies to encourage a focus on the
customers.
Target costing have linked with an organization’s competitive strategy. This competitive environment
influences the ability of an organization to carry out a chosen strategy. This competitive strategy is
corporation choosers to pursue identify the manner with which management intends to compete
successfully in their market. Therefore, target costing able to help an organization to achieve their
company’s goals by satisfying the market demands at an acceptable level of profitable because target
costing can reduce the cost of production when the production is being process.
Most of the Japanese companies (over 80% of all assembly-type industries), such as Nissan, Canon,
Sony, Toyota and so on are using target costing (Hibbets, Aleecia, Tom, Wilfried, 2003). The main
purpose of target costing is reducing the life-cycle costs of new products while ensuring customer
requirement of quality of the product. Several researchers were found that in current market, a market-
oriented cost management system is needed causes by the increasing of competitors, globalization, price
competition, and shorter product life cycles (Hibbets, Aleecia, Tom, Wilfried, 2003).
Thus, production process must be effective, and produce high quality products in the lower costs.
According to the authors, organization which is choosing low-strategy prefers to implement target
costing. These organizations may pursue opportunities or cost reductions and adopt new programs as
managers become aware of them. Besides, differentiators also tend to adopt target costing because their
able to operate from a customer perspective.
The five factors that influence target costing process by analyzing six Japanese manufacturing firms that
are using this method in their company. Target costing process can be divided into three major steps,
which are market-driven costing, product-level target costing and component-level costing. Firstly,
factor that influence market-driven costing is intensity of competition and nature of the customer. In
order to survive among the aggressive rivals, the firm has to compete head on in terms of product price,
quality and functionality.
Hence, the value of target costing to the firm increases when the intensity of competition increases.
Secondly, product strategy is the factor that influences product-level target costing. Less number of
product lines, high rate of new product introduction and low degree of innovation will increase the
benefits of target costing. Besides that, characteristic of the product is also the factor influencing
product-level target costing.
Target costing becomes more beneficial when product complexity, up-front investments and the period
of product development cycles increases. Last but not least, factor that influences component-level
target costing is supplier-base strategy. The higher reliance that lean enterprises place upon external
suppliers increases the importance of supplier management and hence, component-level target costing.
Then, the more power the firm has over its suppliers, the more benefits it can derive from target costing.
Moreover, target costing process will be more beneficial when supplier relations become more
cooperative.
Design and Development of a Target-Costing System for Turning Operation
The field of target costing is emerging fast as the solution to future product development and cost
reduction. Target costing, value chain analysis, value chain improvement, and quality function
deployment are different approaches that try to achieve the same objective: to produce a product at the
lowest cost with all the required features with adherence to quality conformance and aesthetics. Target
costing can be applied in the design of new product as well as improvement of an existing process.
The first step in determining the target cost of a product is to establish the selling price and the
company’s desired profit margin for a product. Machining is one of the most widely used manufacturing
operations and hence there is a huge potential for cost reduction using the target costing technique. In
this research, a target costing model was developed for turning operation, which uses a structured
approach to reduce the machining costs.
The model was tested using real time data and the results obtained were comparable to the actual values.
This model can be utilized as a starting point in the development of an integrated target costing system
for all machining operations. Machine routing, product design parameters and the type of manufacturing
flow will assume importance as overall costs will have to be considered.
Effect of Implementation