Table of Contents
3Introduction
1. Task 1.41.2 Costing system for use within an organization and
how can it help in minimizing the cost for Toyota61.3 Improvements
to the costing and pricing systems used by Toyota Motor Corporation
(PLC)72. Task 2.102.1 Forecasting techniques to make cost and
revenue decisions in an organization102.2 Sources of funds
available to Toyota Motor Corporation (PLC) for a specific
project123. Task 3.133.1 Appropriate budgetary targets for an
organization and how a budget can be used to set targets and
measure the performance of Toyota133.2. Master Budget for
Toyota163.3. Comparison of actual expenditure and income to the
master budget for Toyota173.4 Evaluation of budgetary monitoring
process of Toyota Motor Corporation (PLC)174. Task 4.194.1.
Processes that could manage cost reduction in Toyota Motor
Corporation (PLC)194.2 Evaluate the potential for the use of
activity based costing205. Conclusions216. References22
Introduction
Globalization has changed the way of thinking and handling
businesses worldwide. Its an integration of markets, which makes it
harder to survive in the high-competitive and constant change
atmosphere. This is why organization has the responsibility to do
whatever they can (strategies, innovation, investments, etc.) in
order to survive and be able to grow. This phenomenon has some
features that are important to know, to understand how it impacts
the business world and why its so important for companies to know
how to adapt to it. These features are: planning and operating to
expand; relating domestic and foreign markets; buy and sell goods
and services worldwide; forming manufacturing and distribution
accommodations throughout the world; global market consideration;
factors of production and inputs; global orientation in strategies,
organizational structure, organizational cultureand managerial
experience; have a vision for a global market (all markets
integrated as one whole market) (MBA Knowledge Base, 2012).Toyota,
like other multinational organizations have a more world-wide way
of handling their business in order to grow and keep expanding
overtime. For this, their procedures, workers, strategies,
processes have to be trained and performed globally.Toyota has find
in the necessity to expand, because new markets make a higher rate
of profits (MBA Knowledge Base, 2012), and for that, this document
will take a look at their financial statements and their budgets,
to observe how theyve managed their sales and their costs to handle
the business. 1. Task 1.
1.1 Importance of costs in the pricing strategy for ToyotaAs
explained before, globalization has changed the way business have
been handled through the years, and this affects every branch
within the organization; in this case, the focus will be centered
in the financial area. A very important and essential way to
compete nowadays is through low-cost and pricing strategies. Like
many companies worldwide, Toyota is in the need of lowering costs
without leaving aside a good management of resources. Some
organizations have been changing their costing systems to their
best interests and to facilitate their processes and strategies for
achieving their goals, despite that a great amount still use
traditional costing as their main approach (Cooper and Kaplan,
1991).But changes need to be made in a business world that turns in
constant alterations. The following reasons explain why its hard to
only perform any the traditional costing system, and why new
methods must be implemented to success (Gunasekaran et. al, 2005):
Traditional costing systems dont provide sufficient non-financial
information
Inaccuracy Low improvements Overhead costs are predominantThe
traditional costing systems helps managers with valid information
about salaries and depreciation, but at a department level. But as
mentioned before it doesnt bring up any data concerning
non-financial terms. Information, as the effectiveness and
performance of a worker, is needed today to calculate the costs in
every processes and procedure in a company (Miller 1996). Target
Costing targets a cost per unit- (Harvard Business School, 1997)
and A, B, C costing systems costs assigned provide the performance
and how much an object or activity consumes during a certain period
of time, to perform its objective- (Marx, 2009) are a modern view
of managing costs in an organization. Throughout the document
further explanations will be provided, as Toyota performs under the
first method and could develop improvements with the
second.Structurally, costing has a very important role regarding
Price strategy in Toyota and every organization. This is, because
according to Griffin (2013), in an article she wrote on Chron.com,
pricing strategy has three main contents: Cost and profit
objectives
Consumer demand
Competition
Companies, entities, sellers, all must have these concepts in
mind when trying to figure out a price. Take in mind that all costs
and expenses (manufacture, financial, administrative, etc.) must be
added up and compared to sources of revenues. Also, factors, such
as competition, customer and demand must be taken in account to
calculate a price that fits your desirable profits. (Griffin,
2013)Pricing can be based in different criteria, according to what
the organizations objectives are and how they plan to achieve them.
Having this in mind, pricing could be cost-based, demand-based or
competition-based. In cost-based pricing, prices are base don costs
during the production chain and profit the company expects to have
with every unit sold, but it doesnt have the demand under
consideration. In demand-based pricing, an organization can
determine profits and costs within a range of price made by
research of a certain customer basis. In competition-based pricing,
prices are based on competitors existing market prices (Griffin
2013). As it can be inferred, in every price settlement situation,
cost is essential. In Toyotas case, they have many products
worldwide, and their price strategy depends on the customer segment
they are aiming, so every product has a different price.1.2 Costing
system for use within an organization and how can it help in
minimizing the cost for ToyotaThe system used by Toyota has the
objective of reducing product cost in a certain stage of the
production process, more specifically, the design part. Its called
target costing. The design then was changed several times to adjust
a cost reduction in the interest of the company and would fulfill
their goals that were set for the purpose of this system. Material
and labor prices were kept in mind while creating this model
(Harvard Business School, 1997).They measured various factors that
contributed to the accumulation of costs and tried to reduce them
by re-designing new models in order to achieve their optimized
goal, or cost-planning goal as they decided to call it. These
specific factors are: labor, materials, depreciation, and
production volume helped to define this last one. All these data
was recollected and saved to be compared with the newly designed
models and see how close they were to their target and what
solutions could they find next to accomplish it (Harvard Business
School, 1997). This also helped to make a comparison between the
profits they made in each event and make sure that profits werent
affected in a way they could be decreased, and also define the
difference between the cost between current and new models and
consider the results (Harvard Business School, 1997).The cost
reduction at each stage of the production process was controlled so
that the overall objectives were achieved. This means that the
company was definitely settled to perform a low-cost strategy as
their way of competition and all these goals and targets were
stated in the budget control they made (Harvard Business School,
1997).Estimated costs are used as the element of comparison to the
target costs that are considered as great view to the future, in
other words, as a long-term plan. The system helped to define
stages of the production process that could have cost reductions
and adapt it to the budget, as it was mentioned before, and it was
created to estimate the cost of new products and also to foresee
target profits of new models (Harvard Business School, 1997).
This system is similar to the Activity Based Costing (A, B, C)
system which focuses on activities as the basic cost objects and
uses the costs of these activities as building blocks for compiling
the costs of other cost objects (Marx, 2009) The use of the
activity based costing system provides many advantages regarding
different activities within a company, in this particular case, to
Toyota. According to Marx (2009), the activities that are benefited
from the implementation of this system are:
Activity based costing
Activity based cost management
Activity based budgeting
Activity reporting
Performance measurement and benchmarking
Continuous improvement
Product/customer and sector profitability
Business process re-engineering1.3 Improvements to the costing
and pricing systems used by Toyota Motor Corporation
(PLC)Improvements to the costing and pricing systems used by Toyota
can be achieved by a Design of a Performance Based Costing (PBC)
system. This is a technique that is focused on performance, at any
level. This means to concepts of finance and non-financial. This
provides more accurate information than the traditional system
(Gunasekaran et.al, 2005).The fundamental objective of this system
is to calculate direct costs in the areas that produce value to the
company (Toyota) in its production. This involves factors such as
direct labor, direct materials, among others, so a total product
cost can be estimated. The accuracy of product cost depends upon
the costs of value creation areas and corresponding drivers
(Gunasekaran et. al, 2005).
Therefore, this system can provide more accurate information for
Toyota than other systems (like the traditional one), resulting in
a more precise estimation of a total product cost.
Figure 1 below, taken from Gunasekaran, et. al (2005), shows the
series of steps in this system. This process is very specific and
has determined guidelines to help the connection between each step
develop the systems purpose. First the objectives must be
identified to have a clear picture of the direction the system will
follow to achieve its objectives. From this, the development of the
system and analysis through drivers, costs and value areas will
help to establish a system that will best suit the interest of the
organization, to finally define it and implement it.Figure 1.
Source: Gunasekaran, A. et.al, 2005.
2. Task 2.
2.1 Forecasting techniques to make cost and revenue decisions in
an organizationForecasting is an essential tool for managers,
governments and companies to visualize what the future look like in
terms of defining risks, operations, opportunities or possible
encounters that they may face. According to Dave Yost, Auditor of
the State of Ohio, USA, in the financial area this technique should
be monitored and updated regularly, for it to help in
decision-making solutions, by having the following advantages:
Develop an understanding of available funding
Evaluate financial risk
Assess the likelihood that services can be sustained
Assess the level at which capital investment can be made
Identify future commitments and resource demands
Identify the key variables that cause changes in the level of
revenue and expenditures
There are two approaches to develop forecasts. These are:
Quantitative and qualitative. Companies may collect the following
data, regarding to the method they decide to implement for their
forecast, according to Yost (2013):
QualitativeA. Judgmental (Purpose: Forecast is based on
evaluation)B. Consensus (Purpose: Forecast is based on group
decision)C. Expert (Purpose: Forecast is based on advice from
expertise on a specific area) Quantitative
A. Trend Analysis (Purpose: To Compare historical
information)
B. Multiple Regression Analysis (Purpose: The use of
acknowledged factors determine forecasted change)C. Time-Series
Analysis (Purpose: To determine the average change in specific time
periods)
Figure 2 shows a forecast based on growth of different accounts
in an income statement. These figures from the periods 2010- 2012
were taken from Toyota Global (2013), however, the percentage
growth is a simulation made to carry out the exercise. The
simulated growth percentages help to develop the expectations for
the year 2013, highlighted in yellow. In this case, the Figure 2
shows an example of a Time-Series Analysis to demonstrate an
illustrated forecast.Figure 2.
2.2 Sources of funds available to Toyota Motor Corporation (PLC)
for a specific projectAccording to Finance for Marketers (1997), a
text found in the FAO Corporate Document Repository, there are
several ways in which entities, companies or organizations can
Access new funds. These are:The capital markets
The capital (stock) markets Loan Stock
Bank Loans
Government Sources
Leasing
As Toyota being a multinational and developed company that has
the ambition to expand, participation in the capital (stock) market
will make new investors to purchase shares of Toyota, according to
the performance and development of the company. Currently, Toyota
has been having issues with recalled vehicles, which has put in
doubt their reputation and has made an impact on their sales (CBC
News, 2012).
3. Task 3.
3.1 Appropriate budgetary targets for an organization and how a
budget can be used to set targets and measure the performance of
ToyotaToyotas budgetary system is very particular and unique. This
is, because it has several factors that differentiate it. According
to Tanaka (1994), these are:
Emphasis on variable costs. Budget goals involve variable costs.
These are to be reduced through continuous improvement. Many cost
centers. Indirect costs are not assigned to products.
The budgeting system supports a matrix organization.
The budgetary system in Toyota helps management to aim, with
anticipation, for short and long-term targets, regarding profit,
sales, lowering costs, among other factors. Budgeting in Toyota has
factors to consider such as variables and fixed costs budgets.
Figure 3, taken directly from Exhibit 1 of Tanaka (1994) explains
in detail how the budgetary system of Toyota works. It shows hoy
profit targets (long and short-term) affect costs to develop budget
and further comparison among them.Figure 3.
Next, is Figure 4, which shows elements of the Income Statement
of Toyota from 2010 to 2012. A change in an average budget for
sales and costs is presented, which affects directly the net income
account. As Figure 2, it shows a simulated scenario, proving how a
budget can be fully used or not, and how it may improve the
distribution of budgets according to an activitys needs. (Source of
information of Figure 4: Toyota Global, 2013). In this case, the
budget disposal is the limit made by the company on how much an
activity may cost. Highlighted in grey, is the final amount used
for each account in the year 2013. Thus, the Difference Used is the
difference between the Budget Disposal and the amount used in 2013
in each account.Figure 4.
3.2. Master Budget for ToyotaThe master budget is an overall
budget that involves all other budgets in a firm and its usually
planned for the whole fiscal year (Peavler 2013). According to
Peavler (2013), a master budget has two main parts, which are:
Operating budget: Creates a budgeted income statement, showing
income-generating activities. Financial budget: Creates a budgeted
Balance Sheet.Figure 5 shows a part of an operating budget of a
master budget for Toyota, as an example to explain how it works. As
in previous illustrative examples, the figures for the years from
2010-2012 were extracted from the income statement of the company,
while the budget and result for 2013 are simulated to carry on the
exercise. The Figure shows a Budget created for 2013 is created
following the amounts spent or consumed id the previous years of
these specific accounts. From this, a forecast made for the year
2013, helps to illustrate how the amount spent was limited by the
budget for the Sales of product and Cost of products sold, but the
Cost of financing operations clearly exceeded this
limitations.Figure 5.
3.3. Comparison of actual expenditure and income to the master
budget for ToyotaA comparison of the actual expenditure and income
to the master budget created previously will help to clarify what
was mentioned earlier, about how much was spent identifying if the
budget is insufficient and needs to be extended or if it can be
simplified. Figure 6 shows this comparison, illustrating that the
difference of the budget made for each account and what was used is
highlighted in red.Figure 6.
3.4 Evaluation of budgetary monitoring process of Toyota Motor
Corporation (PLC)Tanaka (1994) explains that there is a concrete
budgeting and manufacturing system for Toyota, and that both
correspond to the Total Quality Control (TQC) achievement that they
have reached. This is based on the culture implemented in the
company, known as Kaizen, which means continuous improvement. He
also refers to a very important term to understand the mentality of
the company; this is Kanban which refers to the productivity ideal
of Toyota; it means just-in-time manufacturing (Tanaka,
1994).Tanaka (1994) makes a complementary adjustments to the fact
that Toyotas is not only constructed on target costing, but on cost
control and kaizen as fundamental factors. This is a very unique
mix and vital for the culture of Toyota. Tanaka (1994) states that
this system provides advantages in four specific concepts. These
are: Senior management has the responsibility for making a profit
and budget management.
Eliminates unfair performance evaluations.
Kaizen is easy to understand, which is a factor of motivation.
It determines the objectives of the company and employees.
High standards are required in every part of a process that is
carried out. These have helped Toyota to achieve a good reputation
due to the quality of their products (nonetheless, there has been
some problems in the past years and a great amount of recalls have
been made worldwide). Also, these particular features of Toyotas
budgetary system provide the upper management a clear vision to
plan in advance for the future.
Cost control in Toyota involves the concepts of target costing
and kaizen budgeting (explained earlier in the document). Board
members gather in what are called councils for a conglomerate of
cost and budgeting controls, which result in strategic decisions
(Tanaka, 1994). The consensus by the councils been the monitoring
in Toyota so far, but these controls may also be more effective if
supervisors, in each step of production, keep a documented
transcript following each cost and performance of their activity
and, because they have more knowledge in the specifics of the
processes made constantly than upper management that mainly makes
strategic decisions, supervisors may help to lower cost with new
alternatives and with not much burocracy and slow decisions. 4.
Task 4.4.1. Processes that could manage cost reduction in Toyota
Motor Corporation (PLC)Globalization and economical changes have
made a great impact on the automotive industry. According to
Oetinger et. al (2002), companies need to focus on developing five
critical capabilities, in order to reduce costs. These are: Supply
Chain Planning
Agile Manufacturing
Trading Partner Collaboration
Sourcing and Procurement
Administrative Cost ReductionTo reduce costs, many factors have
to be considered and Toyota does not have control over some, which
makes it hard to do so. These factors depend on the implementation
of a solid manufacturing process. Toyotas been trying to reduce
cost as a strategy to compete, but its difficult to find innovative
ways to do so when they are out of Toyotas ability to achieve these
cost reductions (Wikinvest, 2007).
Toyota has continued to reduce costs and improve on performance.
According to Wikinvest (2007), one of these measures is the
reduction in the number of platforms used in vehicle production.
These make unique structures to the models they are designing. They
have been trying to re-use the platforms for different models,
lowering the costs of bringing and using more platforms,
instead.
Toyota must make an internal analysis and see through the
techniques revised through the document, how to lower costs by
liquidating any repeated process or simplifying it in a way that
the final product is not affected in its quality. Also, expenses in
administration and finance may be controlled in a budget so that
they stay fit to a certain limit, without making that the net
profits also decrease. A system is worthless when a reduction of
costs is taking place but the profits are also decreasing. The
integration of processes is essential to reduce costs in todays
business world. 4.2 Evaluate the potential for the use of activity
based costingAs explained at the beginning of the document,
Activity Based Costing (A, B, C) system focuses on activities as
the basic cost objects and uses the costs of these activities as
building blocks for compiling the costs of other cost objects
(Marx, 2009).Its important to mention that this system, the costs
are given to the different activities throughout an organization,
due to the way the resources are being used. Afterwards, the
purpose of the system is to unite all the costs that were assigned
to the different activities to form a final product cost, giving an
accurate estimation on how each activity affected the production
(Marx, 2009). The use of the activity based costing system provides
many advantages regarding different activities within a company, in
this particular case, to Toyota.
Activity based costing provides the necessary information for
managers to make better decisions and brings acknowledgement in to
which activities use resources and how much they do. This can be
used to improve performance in companies (for instance, Toyota) and
understand why activities occur and simplify processes if necessary
to reduce costs.
5. Conclusions
Toyota has been trying to reduce their cost by their unique
system of Kaizen. This involves target costing as well. A, B, C
Costing system has proven to be of great benefit if implemented
properly. Different scenarios, using actual figures from Toyotas
financial statements were made to prove concepts such as
forecasting, budgeting and variance.The company needs to develop
innovative ways to reduce costs without forgetting about the
quality of their products and their sales. As seen through the
income statement, they have achieved to lower costs but they have
decreased their sales as well. To succeed new elements have come to
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