Target Costing at Toyota
There are numerous differences between management practices in Western companies and companies in Japan. One of the main differences is related to cost reduction. A manager in Europe or the United States generally expects to use cost information to make decisions about pricing and investments, while a Japanese manager expects to use cost information to control costs. 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. Target costing is defined as a companywide profit management activity during the new product development stage that includes: (1) planning products that have customer-pleasing quality, (2) determining target costs (including target investment costs) for the new product to yield the target profit required over the medium to long term given the current market conditions, and (3) devising ways to make the product design achieve target costs while also satisfying customer needs for quality and prompt delivery. Target costing was invented by Toyota in 1965.
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