Management And Accounting Web

Tanaka, T. 1993. Target Costing at Toyota. Journal of Cost Management (Spring): 4-11.

Summary by David Alvarez
Master of Accountancy Program
University of South Florida, Fall 2001

Japanese Management Main Page | Target Costing Main Page

“Major differences seem to exist between what Western and Japanese manufacturing executives expect from cost information and how they use it. 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.”

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.

Estimating Differential Costs

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.

Promoting Cost Planning

“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.


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.


Related summaries:

Berliner, C., and J. A. Brimson, eds. 1988. Cost Management for Today's Advanced Manufacturing: The CAMI Conceptual Design. Boston: Harvard Business School Press. (Short Summary or Concepts.) (Longer Summary.)

Cokins, G. 2002. Integrating target costing and ABC. Journal of Cost Management (July/August): 13-22. (Summary).

Hiromoto, T. 1988. Another hidden edge: Japanese management accounting. Harvard Business Review (July-August): 22-25. (Summary).

Monden, Y. and J. Lee. 1993. How a Japanese auto maker reduces costs. Management Accounting (August): 22-26. (Summary).

Sakurai, M. 1989. Target costing and how to use it. Journal of Cost Management (Summer): 39-50. (Summary).

Schmelze, G., R. Geier and T. E. Buttross. 1996. Target costing at ITT Automotive. Management Accounting (December): 26-30. (Summary).

Tanaka, T. 1994. Kaizen budgeting: Toyota's cost-control system under TQC. Journal of Cost Management (Fall): 56-62. (Summary).

Yu-Lee, R. T. 2002. Target costing: What you see is not what you get. Journal of Cost Management (July/August): 23-28. (Summary).