Toyota Accounting Practices- ABC Toyota Activity Based Costing

1. Rida Talpur
MBA 01560

3.  Introduction
 Activity based costing
 Objective of ABC
 Toyota and ABC
 Relationship between target costing and ABC
 CVP analysis
 Budget process
 Conclusion
 Recommendation

5.  Industry Automotive
 Founded August 28, 1937; 78 years ago
 Founder Kiichiro Toyoda
 Headquarters Toyota, Aichi, Japan
 Area served Worldwide
 Key people Takeshi Uchiyamada (Chairman)
 Products Automobiles, luxury vehicles,
commercial vehicles, engines
 Revenue Increase ¥27234.5 trillion (FY
2015)
 Profit Increase $58.48 billion (2015)
 Total assets Increase $47,729,830billion (2015)
 Number of employees 338,875 ( march , 2014)

6.  One of the biggest manufacturers in the
vehicle business with the production of 8.929
million units in the five continents of the
world is the Toyota motors (Annual report
2015).
 The journey of Toyota started toward the
end of the nineteenth century with the
development of the first Sakichi Toyoda
automatic loom in Japan, a machine that
that helps to revolutionize textile industry .

7.  Toyota's sustaining and improving quality and
commitment with its potential customers
assists the organization with being on number
one position in the World market.
 Today Toyota's outlets and the manufacturing
units are spread in every continent of the
world (Annual report 2014).
 Toyota involves a main position in the business
sector Auto Asia, has the one of a kind point
of preference of being the best Japanese
brand sold in the United States and to be
number one in Europe.

8.  An activity-based costing (ABC) system is “a cost accounting
system that uses both unit and non-unit-based cost drivers to
assign costs to cost objects by first tracing costs to activities
and then tracing costs from activities to products” (Hansen
34, 96).
 Objective of ABC method is to reduce wrong decisions by
providing accurate cost information. In this method, planned,
controlled and economic general production cost allocation
data is acquired with reference to the assumption that the
products consume activities and activities consume the
resources.

9.  There are two major objective of ABC :
 a) Determining and providing elaborate
information related to the activity
consumption, cost and interest in production
business as a whole.
 b) Providing accurate cost information that is
going to be used in managerial decisions
(Karcıoğlu, 2000).

10.  In ABC method, linking the products with the
costs is based on two basic stages.
 At the initial stage, resources such as energy,
placing, unit stock keeping are divided in
specific parts and every activity is assigned
to the cost pool of its part.
 At the second stage, consumed resources are
measured and these are charged to the
products from the related cost pools. At this
stage, used cost drivers reflects the factors
that direct the product volume-based or non-
based cost varieties. (Şakrak, 1997: 185)

11.  Designing of the ABC method usually consist 5
steps even though it varies from business to
business. These steps are; (Öker, 2003:37)
 1- Identifying activities
 2- Classifying activities
 3- Costing activities
 4- Selecting accurate cost factors for allocating
costs to the products
 5- Charging activity costs to products

12.  As in case of Toyota it targets every segment of
the customers, therefore it has a vast range of
product lines.
 The company's main product lines are SUV's,
Hybrid, Camry, Corolla, Land Cruiser and 4wheel
trucks.
 These product lines are further sub divided
according to the customer range. Although, the
costing system that Toyota is adopting, is activity
based costing and but there main focus is on
target coasting but Target costing is related to
the activity-based costing on three points
(Horvath,1993, s.12-13) .

13.  The first one is determining the estimated cost
 Activities that are used on the indirect areas depending on the
product, can be analyzed by original activity costs.
 The second, activity-based costing can determine the cost
drive of the product planning and the design offer.
 The third, activity-based costing can be used as a tool for
achieving target cost.
 Activity-based costing which identifies the activities
required to realize specific product functions and related to
this, determines the cost allocation keys, assists to
determine the optimal value area by transferring activity
costs to product functions, so in both ways Toyota is
adopting ABC for their costing system.

15.  For years Toyota in the United States has
been offering seminars open to the public,
including competitors. In these seminars, the
Toyota Production System (TPS) is introduced
in detail.
 Toyota’s approach is three-fold: techniques,
systems and philosophy.

16.  Even though Toyota’s techniques and systems
are explained in great detail and can be
copied by competitors, none of them have
been able to reach the same degree of
efficiency as Toyota (Taylor, 1997).
 However, Toyota is still lacking in effective
cost allocation, as they are allocating their
cost according to their product line but in that
product line they are not allocating their cost
properly. (Bengü, H. (2010).

17.  Cost-volume-profit analysis is a managerial
accounting technique used to analyze how
changes in cost and sales volume affect
changes in a company's profit (Lewis, 2015).
The technique is widely used in business and
has many advantages (Freedman, 2015):

18.  1. Make or buy decision:
 The C-V-P analysis assists in making a choice between
two courses of action to make versus to buy. If the
variable cost is less than the price that has to be paid
to an outside supplier, it may be better to
manufacture than to buy.
 2. Production planning;
 The C-V-P analysis helps in planning the production of
items giving maximum contribution towards profit and
fixed costs.
 3. Cost control:
 As a cost control device, the C-V-P analysis can be
used to detect insidious upward creep of costs that
might otherwise go unnoticed.

19.  4. Financial structure:
 Break-even analysis provides an understanding of
the behaviour of profits in relation to output.
This understanding is significant in planning the
financial structure of a company.
 5. Conditions of uncertainty:
 When some reasonable basis for subjective
extrapolation is available, the breakeven analysis
provides the financial management with
information helpful in its decision-making
activities.

21.  Toyota’s budgeting system is not purely
based on target costing, but instead on cost
control, target costing, and kaizen.
 In Toyota senior management has ultimate
responsibility for making a profit and for
administering the budget.
 The goals set for employees are in terms of
kaizen and tend to motivate employees
because kaizen is simple and understandable
by all ( Tanaka,1994. ).

22. Comparison Between ABC and Kaizen Costing
Feature ABC Kaizen Costing
Control location Within cost system
Outside of cost
system
Feedback time frame Long term Short term
Connection between cost
system and strategic
decisions
Connection is made
through cost
accounting
Connection through
cost accounting is
not critical
Primary focus on costs Fixed costs Variable costs

23. Relate transactions to cost
accounting
Transactions are directly
related to cost accounting
Transactions are not
directly related to cost
accounting
Use of cost drivers and
performance measures
Use activity cost drivers and
performance measures
Use performance measures
Nature of methodology
Comprehensive cost
accounting and management
methodology
Tool for motivation and
enforcement

24. Toyota’s budgeting system is totally separate
from its financial accounting system and is very
different from most budgeting systems. Some of
these differences include:
 (1) Emphasis is on variable costs.
 (2) Budget goals are in terms of variable costs
to be reduced via continuous improvement.
 (3) There are many cost centers .
 (4) Indirect costs are not allocated to products.
 (5) The budgeting system supports a matrix
organization.

26.  Tanaka (1994) describes Toyota’s control
structure, which is a matrix of vertical job-
specific units and horizontal function–specific
controls.
 One of the main function-specific controls is
cost control and is comprised of target
costing and kaizen budgeting functions.

27.  Additional functions that support cost control are:
"planning, technology, production, sales, and
personnel & general affairs (58)."
 Councils, comprised of 10 board members, closely
monitor the aforementioned functions and are
responsible for strategic decision making. As such,
each council makes up a functional budgeting
component.
 In Australia, and probably elsewhere in the world,
Toyota has a balanced scorecard which notes
specific outcomes and measures of environmental
action, and uses a plan-do-check-act cycle to carry
them out.

28.  From the years the success of Toyota has
remained a mystery for their competitor
even though they have given the clarification
and talk on their system of costing but still
the rivals are failed to follow the way of
Toyota once of the reason could be that It
has successfully understood the use and
benefits of ABC and with their cultural
coasting which is Kaizen they have
implemented ABC with target budget which
has made Toyota become no 1 in globe.

29.  From the online videos and research it was found
that manufacturing process of Toyota is mostly
done through machine operated. Toyota should
allocate their cost according to the machine hours
or labor hours, which required in the
manufacturing of one unit.
 Secondly, there should be a proper check on the
variable costs, which is some time differs from one
unit to another. There should be a proper cost
allocation for the fixed cost of machinery, which is
used for a specific product line which will make
their system more efficient as well as cost cutting
and less complex.