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Target Costing

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Target Costing

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

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