Costing practices in automobile industry

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Costing practices in automobile industry


The fundamental objective of target costing is to manage the business to be profitable in a highly competitive marketplace. In effect, target costing is a proactive cost planning, cost managementand cost reduction practice whereby costs are planned and managed out of a product and business early in the design and development cycle, rather than during the later stages of product development and production.

Although the ideas of target costing were also applied by a number of other American companies including BoeingCaterpillarNorthern Telecomfew of them apply target costing as comprehensively and intensively as top Japanese companies such as NissanToyotaNippondenso.

It did not receive global attention until late s to s when some authors such as Monden[6] Sakurai[7] Tanaka[8] and Cooper [9] described the way that Japanese companies applied target costing to thrive in their business IMA With superior implementation systems, Japanese manufacturers are more successful than the American companies in developing target costing.

Costing practices in automobile industry

Process of target costing[ edit ] The process of target costing can be divided into three sections: Market driven costing can go through 5 steps including: Only realistic plans are accepted to proceed to the next step.

Product mix is designed carefully to ensure that it satisfies many customers, but also does not contain too many products to confuse customers.

Costing practices in automobile industry

Company may use simulation to explore the impact of overall profit objective to different product mixes and determine the most feasible product mix.

Target selling price, target profit margin and allowable cost are identified for each product. Target selling price need to consider to the expected market condition at the time launching the product. Firms might set up target profit margin based on either actual profit margin of previous products or target profit margin of product line.

Simulation for overall group profitability can help to make sure achieving group target. Subtracting target profit margin from target selling price results in allowable cost for each product.

Allowable cost is the cost that can spend on the product to ensure meeting profit target if selling it at target price. It is the signal about the magnitude of cost saving that team need to achieve. Product-level target costing concentrates on designing products that satisfy the company's customers at the allowable cost.

To achieve this goal, product-level target costing is typically divided into three steps as shown below. Since the allowable cost is simply obtained from external conditions without considering the design capabilities of the company as well as the realistic cost for manufacturing, it may not be always achievable in practice.

Thus, it is necessary to adjust the unachievable allowable cost to an achievable target cost that the cost increase should be reduced with great effort.

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The second step is to discipline this target cost process, including monitoring the relationship between the target cost and the estimated product cost at any point during the design process, applying the cardinal rule so that the total target costs at the component-level does not exceed the target cost of the product, and allowing exceptions for products violating the cardinal rule.

For a product exception to the cardinal rule, two analyses are often performed after the launch of the product. One involves reviewing the design process to find out why the target cost was unachieved.

The other is an immediate effort to reduce the excessive cost to ensure that the period of violation is as short as possible.It gives an eye opener to the Indian government about abolishment of Cost Audit and Costing methods for the Indian Automobile Industry.

This research article for those industry players who think that Cost Audits a leakage of business information and are unproductive for the automobile industry.

Target costing - Wikipedia

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The data extraction form for FCA studies included title, authors, year of publication, place of study, type of industry, type of focus (industry, organisation, project, product or process) and a brief method description. While the automobile is a commonly used product, it is an extremely complex and technologically sophisticated one.

Manufacturing new cars requires state-of-the-art technological methods and processes. In addition, supplier industries of the automotive manufacturing industry, . Why the Big Three Put Too Many Cars on the Lot. Using absorption costing to monitor efficiency can lead companies to make poor production decisions, Krishnan says.

which the auto industry.

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