Target Costing System Analysis

Statement of the Problem

Toyota Motor Corporation is one of the largest and most well known automobile manufacturers in the world today. Apart from leading in quality the company is also knows for its cost cutting efficiency without compromising quality. As the paper on Toyota Motor Corporation says, Toyota has almost consistently been able to calculate its costs of new models correctly.

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The automobile market is one of the most competitive markets in the world. The high level of competition, changing customer preferences and environmental concerns has made this market very difficult for manufacturers to remain competitive. For all its efficiency in targeting cost, its true effectiveness can only be gauged by the actual success of its new models. The main problem here that the success or failure of a model that can happen in real life situations have not been considered.


With its manufacturing efficiency, quality and cost cutting efficiency, Toyota Motor Corporation is holding a secure place in the automobile world. Unless any dramatic developments take place, the company will retail its place as a market leader for a long time to come. But the nature of the automobile industry especially in countries where Toyota operates is very mature and highly competitive. Even with world class vehicles it would require a very efficient marketing department to successfully market its models. There is no indication that Toyota is lagging behind in this department. But the fact is that other automobile companies too have matching capabilities of Toyota, with different strengths and of course weaknesses. There are many manufacturers who have the technology and marketing acumen to compete with Toyota. Other external concerns like environment and rising price of fuel also have to be considered. Unless the company tries to maintain its competitiveness its cost targeting and estimating efforts will be meaningless. The high time lag of four years (which is quite common among auto manufactures) between proposal and actual production is also a crucial factor that can impact the success or failure of a model in a competitive market. A comparison of actual costs and target cost under different scenarios is given in the appendix at the end of the paper.

Key Facts

Toyota Motor Corporation has undoubtedly shown that it is a world class automobile manufacturer. It has consistently produced cars of the highest quality at competitive prices. Moreover it has evolved a very efficient targeting system that is ‘technically’ one of the most advanced in the automobile sector. The company regularly introduced new and successful models almost every four years. It is also doing research and development of more eco-friendly automobiles. The combination of high technology, quality and cost effectiveness is an unbeatable combination. It can be assumed that the competitiveness of the company will remain high in the future also. In spite of all these advantages, market competitiveness and other uncertain external factors cannot assure that the situation for the company will remain so in the future.

Alternative solutions

The proposal for a new model always is made by the chief engineer. It can be assumed that such a proposal will come when the company has streamlined all operations for past launches and is ready to make and design new models. But in reality, the marketing department, who is familiar with the pulse of the market, is a better judge regarding the timing of a new launch. Hence the following two alternatives can be considered.

  1. The current practice followed for the launch of a new model is when a proposal for the same is given by the chief engineer. The marketing and other department then formulate a plan around the proposal and proceed with the design and production of the new model. The alternative would be that the chief engineer first meets the marketing department with the idea before giving a formal proposal.
  2. The marketing department could be given the responsibility of informing the company and the chief engineer that a new product or model with a certain design and performance be launched. This would be after a thorough study of the market.

Alternative ‘a’ would only be a slight improvement over the existing method followed by the company. In the case of the second alternative a new model will be proposed when there is a possible future market for the new model. It would be the job of the chief engineer and other concerned departments to work through the plan proposed by the marketing department and not the other way around.

Decision: It has been decided that option ‘b’ would be the course of action taken by the company for future models. A meeting of the chief engineer and the marketing department will be held and the formalities worked out. The marketing department will have a team for market research. As and when they feel that the market is ready for a new model, a meeting with the chief engineer will be called. The chief engineer in turn will meet with the production and design departments. A proposal based on the recommendations of the marketing department will be given by the chief engineer. If possible, the model design can be included in the report. The rest of the procedure with regard to cost costing and cost estimation will follow the steps already formulated by Toyota Motor Corporation since it is a tried and tested method.

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Comparison of actual cost and target cost: Fixed costs of a company remain the same whether a company over or under achieves its targets. It is one of the main factors that will decide the profitability of any product depending on its level of success in the market. Two different scenarios where the company achieves its estimation and where the company sales figures fall short of expectations are given below. (All figures and projections are fictitious and have no relation to Toyota Motor Corporations sales figures and estimates). The target set for a fictitious model A is 30,000 units per year.

Company Achieves Target

  • Target cost: $30,000
  • Estimated cost: $30,000
  • Fixed costs per year: $ 300 million
  • Variable costs per year: $600 million
  • Total costs: $900 million
  • Actual costs: total costs divided by number of units = $30,000

Company underachieves targets

  • Actual production: 15,000 units
  • Target cost: $30,000
  • Estimated cost: $30,000
  • Fixed costs per year: $ 300 million
  • Variable costs per year: $350 million
  • Total costs: $650 million
  • Actual costs: total costs divided by number of units = $43,000
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