SISTEM MANAJEMEN BIAYA NISSAN MOTOR COMPANY, LTD.: TARGET COSTING SYSTEM
NAMA : ASTRID RUDYANTO AULYA AGUSTIN DWI ANDHINI LINDA WIMELDA RONNY ROY SEMALI
(1306498235) (1306498241) (1306498550) (1306498834)
CLASS : AKM/2013-2S
MAGISTER AKUNTANSI FAKULTAS EKONOMI UNIVERSITAS INDONESIA
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Universitas Indonesia Fakultas Ekonomi Program Studi Magister Akuntansi – Pendidikan Profesi Akuntansi
STATEMENT OF AUTHORSHIP Saya/kami yang bertandatangan di bawah ini menyatakan bahwa makalah/tugas terlampir adalah murni hasil pekerjaan saya/kami sendiri. Tidak ada pekerjaan orang lain yang saya/kami gunakan tanpa menyebutkan sumbernya. Materi ini tidak/belum pernah disajikan/digunakan sebagai bahan untuk makalah/tugas pada mata ajaran lain, kecuali saya/kami menyatakan dengan jelas bahwa saya/kami menggunakannya. Saya/kami memahami bahwa tugas yang saya/kami kumpulkan ini dapat diperbanyak dan atau dikomunikasikan untuk tujuan mendeteksi adanya plagiarisme. Nama Mahasiswa
: ASTRID RUDYANTO (1306498235) AULYA AGUSTIN DWI ANDHINI (1306498241) LINDA WIMELDA (1306498550) RONNY ROY SEMALI (1306498834)
Kelas
: AKM/2013-2S
Mata Ajar
: SISTEM MANAJEMEN BIAYA
Judul Makalah/Tugas
: NISSAN MOTOR COMPANY, LTD.: TARGET COSTING SYSTEM
Hari, Tanggal
: SABTU, 9 MEI 2015
Nama Pengajar
: Thomas H. Secokusumo, MBA. CMA
Tandatangan
:
ASTRID RUDIYANTO
AULYA AGUSTIN DWI ANDHINI
LINDA WIMELDA
RONNY ROY SEMALI
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NISSAN MOTOR COMPANY, LTD.: TARGET COSTING SYSTEM
INTRODUCTION Nissan Motor Company, Ltd., founded in 1933, was considered as the most highly globalized of the Japanese automobile companies and the world’s fourth-largest automobile manufacturer. It implemented a plan to achieve annual domestic sales of 1.5 million cars by 1992 and to obtain the number-one rating in terms of customer satisfaction in additional of its corporate strategy of providing high quality products, short delivery times, and high functionality. Automobile firms had been steadily increasing their range of products since the 1950s. This increase was driven primarily by changes in consumer preferences. Thus, Nissan had chosen to systematically reduce the number of distinct model it would introduce in 1990s. These trends suggested to Nissan top management that overall profitability would be increased by reducing the number of distinct models supported, while maintaining the same level of effort to design and market the remaining models. Over the years Nissan had developed a formal procedure to introduce new products, which is target costing system. The procedure to introduce new models was divided into three distinct stages, they are: a. The conceptual design stage (2 years); b. The production development stage (4 years); and c. The production stage (4 years).
OVERVIEW OF NISSAN’S TARGET COSTING SYSTEM In the conceptual design stage, projects to introduce new product models were initiated. First, it described the matrix that contained qualitative information about each model. The primary purpose was to ensure that Nissan achieved the desired level of market coverage. The conceptual design was sufficiently developed to allow a rough estimate of the number of vehicles to be sold and the costs associated with its development. The purpose of this study was to ensure that the new model was likely to generate a positive contribution over its life by determining the life cycle contribution study. As the conceptual design of the new model progressed, additional consumer analysis and financial analysis was undertaken. The latter one consisted of rough profitability study in which the profitability of the highest volume variant of the new model was estimated using historical cost estimates and the latest estimate of that variant’s target price. This target-selling price was determined by taking into account a number of internal and external factors, while the target profit margin was determined by careful consideration of available information on the customer. Then the allowable cost can be calculated by the following formula: Allowable cost = target selling price – target profit margin The first value engineering process was conducted when the allowable costs were considered to be too far below the estimated cost. After the first value engineering stage was completed, 3
a major review of the new model was conducted, including an updated profitability analysis and an analysis of the performance characteristics of the new model. In the product development stage, the first step was to prepare a detailed order sheet for the new model. Suppliers were expected to provide price and delivery timing estimates for each component. The next step was to produce the engineering drawings for trial production. Value engineering was used at this stage to determine allowable costs for each of the component in every major function of the automobile. To avoid having to develop target costs for all 20,000 components in a typical new model line, the engineers only performed detailed target costing on two or three representative variations. The next phase was to construct two or three prototype vehicles. The output of this stage was called the final target cost. For clearer information about Nissan’s target costing system, in the following (figure 1 and 2) we will introduce the overview scheme of the system separated by 2 different stages: Figure 1: Scheme of Nissan’s Target Costing
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Figure 2: Scheme of Nissan’s Target Costing (con’d)
Nissan Motor Company, Ltd. is rather complicated and complex to be put into one single scheme. However, the basic idea of making such system is still in the corridor of target costing theory, which provided in the common textbooks. They separated the system into 2 stages, where in fact there is no difference in contents with those we know already; marketdriven costing, product-level target costing, and component-level target costing. Although they did not mention explicitly that they set up a strategic cost-reduction challenge in order to deal with the unachievable part of cost-reduction, but they actually used it as we can see from the exhibit 6 given in the paper. Thus, by using the formula below, we can determine the product-level target cost and strategic cost-reduction challenge:
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Cost-reduction objective = current cost – allowable cost Product-level target cost = current cost – target cost-reduction objective Strategic cost-reduction challenge = product-level target cost – allowable cost Following the explanation above, the production cost system in Nissan’s assembly plants will be discussed. Nissan used the same system throughout its entire manufacturer, which basically divide the cost into two subjects; direct and indirect expenses. Three different product profitabilities were calculated as well, where the first one was the direct material marginal profit, the product contribution, and last operating profit. The product costs reported by the cost system had four primary uses. First, they were used in the long-range strategic plan as a basis for estimating future profitability. Second, they were used for cost-control purposes. Third, they were used to help select the product mix, and finally they were used to identify unprofitable variants that were candidates for discontinuance. For clearer information on this approach can be referred to the figure 3 below. Figure 3: Two Stages Diagram of Nissan’s Product Cost System
ADVANTAGES OF THE TARGET COSTING APPROACH There are several advantages of target costing system approach in Nissan we found and are going to be discussed in the following: 1. The target costing system is embedded in a team environment, a cross-functional process that often called as concurrent design. The team members include representatives from design, engineering, purchasing, manufacturing, and marketing, which all of them are focused on the same objective: to deliver a product with a target functionality, quality, and 6
price to a specific market segment. In this environment, there is no room for individual groups to specify product features that reflect a functional fixation. 2. Each subgroup within the team is assigned cost reduction targets that it is expected to meet in order to achieve the team’s overall target cost objective. This approach has the effect of assigning individual responsibilities but within an overall structure of group objectives relating to product quality, functionality, and price. 3. Another major strength of involving different functional areas concurrently in the product and process design is that it reduces product development time and cost by reducing required design changes. All of these time and costs reduction for components can be achieved with the help of critical decisions about the design of the model. As a result of the consumer analysis, the designers aim to reach the consumer requirements. In target costing, first determining the cost and then designing is an advantage from the design point of view. 4. The target costing system is deployed at a time, the product and process design phase, when design choices can have a maximum impact on a product’s cost. However to be reminded that without the discipline of a team approach to product design, an engineering group might design a production process that uses the latest production technology without regard for its effects on cost or manufacturability. The same case may be happened as well for marketing group where it might specify many products features that customers would like to have but do not consider essential in the product and therefore would not be willing to pay to have included in the product design. 5. The target costing system in Nissan includes representatives from their suppliers on the design team of components. The purpose of this program was to elicit their expertise, stronger their relationship by long-term contracts, a negotiated return on the investment they make in product design and manufacturing, and sharing of development cost that they might generate. Alternatively, suppliers can offer their expertise when new components or parts are required so that, for a given level of functionality, the part can be supplied at the lowest cost. Rather the approach is to use lower-cost commodity components rather than custom-designed components and to reduce production costs. 6. The target costing idea reflects the reality that most product and process design decisions are not the lowest-cost designs but rather designs that the organization has decided it can live with. Moreover, the system takes the organization beyond the effort levels usually chosen in satisficing operations and drives the planning activity toward the target cost. 7. Target costing is a flexible way of determining the profits. When it considers the target cost is too low, it allows the target profit margin to decrease, but only if it can increase another product’s target profit margin sufficiently to offset the loss. The outcome for the product with the decreased target margin is an increased target cost; the outcome for the product with the increased profit margin is a decreased target cost. The objective is to maintain the group’s profit target. 8. Target costing may motivate the members of the manufacture (from engineering and finance through to manufacturing and sales) to do continuous improvement since there is a universal belief that there is always some components, activity or area where it is possible to achieve further cost reduction, while maintaining acceptable levels of quality and functionality. Success does seem to be dependent on fostering a firm-wide appreciation and commitment to the idea that there will always be opportunities to reduce cost and on the development of integrated systems to support cost reduction activities. DISADVANTAGES OF THE TARGET COSTING APPROACH Instead of having some advantages of the application of target costing system in Nissan, we also found some of drawbacks of that model: 7
1. The target costing system places huge pressures on the design team. The design team has a common objective: to meet target cost, but unfortunately there is no possibility of negotiation in target costing; the product will not be launched unless the team meets the target cost, which ultimately reflects what the customer demands. Therefore, there is an excessive pressure on design teams to develop and use tools that can help them reach their target cost objectives. 2. Being the first in the market is rather hard to achieve by using target costs since they really depend on the market research and the historical data from previous variant and competitor. Imagine in the condition where the company wants to invent an innovative product for the first time, then this is a big problem because they may not conduct the benchmarking/comparison. Even more, by using the target costs in this condition may stimulate a longer time to develop than by using standard costs. The actual example of this case can be found more obviously in Walkman market, where being the first is more critical than being the lowest price in the market. 3. Confusion on the market. 4. Organizational conflicts may occur when the pressure on reducing the target cost is too high and everybody in the team loses the discipline and starting to point-out to each other. Imagine the condition where the senior managers push the smallest number possible on strategic cost-reduction challenge, while the chief engineer pushes for the number high enough to ensure that the product-level target cost is achievable. The conflict is likely to be happened in this case. 5. Target costing system may lead to shifting the company motivation from product’s performance to product’s cost. Hence, it will bring the company to focus only on reducing the cost as much as possible without considering the effect on marketing and engineering point of views. The company will always try to set overaggressive target costs, and last it would commonly violate the cardinal rule-the target cost must never be exceeded- and lose the discipline. Even worse, if the company knows the target cost is unachievable, the design team might give up even trying to achieve it and never effectively reduce costs.
THE MAIN DIFFERENCES BETWEEN TARGET COSTING AND ABC COSTING SYSTEM 1. The target cost is a financial goal for the full cost of a product, derived from estimates of selling price and desired profit (price-based pricing). In a target-costing framework, product-selling price is constrained by the marketplace and is determined by analysis along the entire industry value chain and across all functions in the firm. Top management sets the desired level of profit on the basis of firm strategy and financial goals. In contrast with ABC costing (cost-based pricing), product cost does not drive the estimated selling price but rather developed from the cost occurred then followed by determining its selling price. Instead, the target cost is the goal that a firm must achieve to meet its strategic objectives (see figure 4).
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Figure 4: Comparison of ABC Costing and Target Costing System
Figure 5: Relation between Target Costing and Standard Costing
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2. Activity based costing (ABC) techniques are predetermined from internal analysis of the production process; that is, ABC techniques are production-driven. Meanwhile, target costs come from both internal and external sources, primarily the analysis of previous variant, markets, and competitors; that is, target costs are market-driven . 3. Target costing is a more valuable cost management tool during the introduction and growth stages of a product life cycle because it provides proactive, before-the-fact information, rather than reactive, after-the-fact information. In the other hand, ABC techniques are often used inappropriately and ineffective as a cost management tool because they provide after-the-fact cost information during a production phase that is changing rapidly as production is ramped up to meet market demand. 4. Target costs are dynamic since they are often revised in the pre-introductory stage and several times again during the introduction and growth stages of the product life cycle. As a result, the target cost for a product may change several times over its entire life cycle until the allowable costs are met closely. For ABC, they are rather static since we cannot revise the cost incurred in every stage until it is really happened in the production stage (current cost). This is related to the reason above where ABC only can use the after-thefact data. 5. Related to the point above, then we can call the target costs as an effort of continuous improvement, while ABC system is about efficiency improvement. Thus, the final result from both of them can differ as well. Since the target costing is using value engineering (VE), design for manufacture and assembly (DFMA), and quality function deployment (QFD) as means to lower the cost during the life-cycle of a product, the product-level target costing can be reduced as low as possible to every aspect of manufacturing. But unfortunately this is not the case of ABC system in HP case because they only tried to reduce the costs that are transparent and obvious to be eliminated (e.g., scrap, utilization, machine-efficiency, etc) according to the improvement on efficiency rate. It believes that fundamental cost breakthrough is much more probable when using target costing. 6. In the target cost, co-operation with suppliers is one of the key factors for successful. It is said that target cost is an activity where realization of cost targets is pursued in cooperation with suppliers. Without their involvement in determining the component-level target cost, it will be hard for such manufacturer to gain the appropriate cost as low as possible like what the allowable cost suggest. This relation is confirmed by the application of an incentive plan in the effort of motivating its suppliers to find any ideas to reduce their component's costs. This is totally different with ABC that never involved external suppliers intensely when determining the cost as an object of management accounting. 7. In the target costs environment, the management gives a "freedom" for design team to reduce their cost by modifying its product characteristics and process planning as far as they are still in the form of product matrix developed earlier by the marketing members. Meanwhile in the HP case we found that the management had provided the design team with what they call as "design rules" already and asked them to follow those rules before they might be thinking on doing some modifications on a product. COMPLEMENTARITIES BETWEEN ACTIVITY-BASED COSTING AND TARGET COSTING Activity-based costing systems can be used to set target costs by identifying activities that are performed by companies throughout their activity value chain. With activity -based management, each activity is systematically analyzed so that nonvalue-added activities can be eliminated and value-added activities can be strengthened and performed in the most efficient way possible, all in an effort to meet target costs. Furthermore, ABC system enables design engineers to understand the impact of different designs on product costs and manufacturing 10
flexibility. For a clearer understanding on this relation, the example of this value chain is shown in figure 6. Figure 6: Value Chain
Activity value chain is used to develop and support an enterprise's production and delivery of products and services throughout their life cycles. The activities linked together represent strategic-level activities found in almost any enterprise. The items listed under each strategiclevel activity are a sampling of specific activities performed to support the strategic-level activities. QUESTIONS 1. What is the competitive environtment that creates the range of product sold? Competitive environtment that creates the ranges of product sold are: a. Sophisticated Japanese consumer and lean enterprise shape the competitive environment; b. Toyota has 45% and Nissan has 25% of market share; c. No brand loyalty; d. Continuous improvement in functionality at the same cost is the confrontation strategy of Nissan. 2. How does Nissan determine its future product mix?
Product matrix can achieve market coverage and decide on the product mix for the next 10 years. The matrix contains information s about target customers like their income levels, their needs, price range, and the ranges of boddy types supported. The Matrix helps identification of body types and models that appeal to a specific group of target customers. Consumer analysis-determine attributes valued by customers and that analysis determines new entries in its product matrix. There are fifty potential models were identified and reduced to thirty models due to costs of differentiation and maintenance of inventory. New models were conseptualized by identiying consumer mind set. It is how customers visualize themselves in relation to their cars. The mind set could be used to identify the design attributes, attributes that play an important psychological role when customers purchase a new car. By identifying cluster of mind set, Nissan could identify market niches that warrant a new model.
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3. What is the purpose in Nissan’s Target Costing System?
The purposeses in Nissans’s Target Costing System are: a. Manufacture products that deliver functionality and quality at a cost that achieves firm’s target profit; b. Proactive control of manufacturing cost; c. Cost is viewed as an interaction function between price and profit; d. Set quality, price and functionality in advance; e. Control is possible because target cost is identified at design stage than at production cost; f. Long term profitability can be secured 4. How does Nissan determine the target margin for new product? Nissan determines the target margin for new product by : a. Price/margin curves for different mixes using simulation b. Many variations are run to examine combination of price, volume and product mix c. Determine robustness mix-probability of new model success and failure 5. What is the role of suppliers in target costing? The roles of suppliers in target costing are: a. With 70 percent outsourced components, suppliers play a critical role, they are the partners. Extermal and internal suppliers were provided with description of each component and their potential production volumes. Suppliers were expected to provide price and delivery timing estimates for each component. b. Suppilers were asked to generate cost reduction ideas. An incentive plan was to motivate the suppliers in the form of regular orders. c. Technical innovation can be shared. 6. What role does the accounting department play? The roles of accounting department are: a. The primary function of accounting is to set the final target cost for each model variant and to ensure that the vehicles were manufactured for that amount. b. As the vehicle entered production, accounting would monitor all components and assembly cost and if these were not in line with the final target cost, accounting would notify cost design and engineering that the final target were not being met. 7. Describe Nissan’s Cost System. Is it strong enough to support the target costing system? The production cost system in Nissan’s assembly plants use the same system throughout its entire manufacturer, which basically divide the cost into two subjects; direct and indirect expenses. Three different product profitabilities were calculated as well, where the first one was the direct material marginal profit, the product contribution, and last operating profit. The product costs reported by the cost system had four primary uses. First, they were used in the long-range strategic plan as a basis for estimating future profitability. Second, they were used for cost-control purposes. Third, they were used to help select the product mix, and finally they were used to identify unprofitable variants that were candidates for discontinuance. 12
The Nissan cost system was continuously undergoing modification. In particular, a program had been initiated to trace as many costs as possible direcly to the production department. Because of that, cost system in Nissan that report product cost strong enough to support target costing because it used for cost control purposes, in particular to ensure that across the production life of product its target cost was maintained. 8. Why is there is no attempt to reduce the cost of vehicle after it enter production? There is no attempt to reduce the cost of vehicle after it enters production because dominant focus of cost management should be during product development, not manufacturing. Once a product has been designed and gone into production, not much can be done to significantly reduce its cost. Product when produced with high technology products with a short life cycle, which favors a high level of designed-in costs and implies that there are fewer opportunities for cost management during the manufacturing phase. A short manufacturing phase makes it difficult for product engineers to correct any design problems (including those that result in high manufacturing costs) after an item has entered production. Thus the company encourages people to solve as many cost problems as they can during the design phase.
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