Table of Contents

3Introduction

1. Task 1.41.2 Costing system for use within an organization and how can it help in minimizing the cost for Toyota61.3 Improvements to the costing and pricing systems used by Toyota Motor Corporation (PLC)72. Task 2.102.1 Forecasting techniques to make cost and revenue decisions in an organization102.2 Sources of funds available to Toyota Motor Corporation (PLC) for a specific project123. Task 3.133.1 Appropriate budgetary targets for an organization and how a budget can be used to set targets and measure the performance of Toyota133.2. Master Budget for Toyota163.3. Comparison of actual expenditure and income to the master budget for Toyota173.4 Evaluation of budgetary monitoring process of Toyota Motor Corporation (PLC)174. Task 4.194.1. Processes that could manage cost reduction in Toyota Motor Corporation (PLC)194.2 Evaluate the potential for the use of activity based costing205. Conclusions216. References22

Introduction

Globalization has changed the way of thinking and handling businesses worldwide. Its an integration of markets, which makes it harder to survive in the high-competitive and constant change atmosphere. This is why organization has the responsibility to do whatever they can (strategies, innovation, investments, etc.) in order to survive and be able to grow. This phenomenon has some features that are important to know, to understand how it impacts the business world and why its so important for companies to know how to adapt to it. These features are: planning and operating to expand; relating domestic and foreign markets; buy and sell goods and services worldwide; forming manufacturing and distribution accommodations throughout the world; global market consideration; factors of production and inputs; global orientation in strategies, organizational structure, organizational cultureand managerial experience; have a vision for a global market (all markets integrated as one whole market) (MBA Knowledge Base, 2012).Toyota, like other multinational organizations have a more world-wide way of handling their business in order to grow and keep expanding overtime. For this, their procedures, workers, strategies, processes have to be trained and performed globally.Toyota has find in the necessity to expand, because new markets make a higher rate of profits (MBA Knowledge Base, 2012), and for that, this document will take a look at their financial statements and their budgets, to observe how theyve managed their sales and their costs to handle the business. 1. Task 1.

1.1 Importance of costs in the pricing strategy for ToyotaAs explained before, globalization has changed the way business have been handled through the years, and this affects every branch within the organization; in this case, the focus will be centered in the financial area. A very important and essential way to compete nowadays is through low-cost and pricing strategies. Like many companies worldwide, Toyota is in the need of lowering costs without leaving aside a good management of resources. Some organizations have been changing their costing systems to their best interests and to facilitate their processes and strategies for achieving their goals, despite that a great amount still use traditional costing as their main approach (Cooper and Kaplan, 1991).But changes need to be made in a business world that turns in constant alterations. The following reasons explain why its hard to only perform any the traditional costing system, and why new methods must be implemented to success (Gunasekaran et. al, 2005): Traditional costing systems dont provide sufficient non-financial information

Inaccuracy Low improvements Overhead costs are predominantThe traditional costing systems helps managers with valid information about salaries and depreciation, but at a department level. But as mentioned before it doesnt bring up any data concerning non-financial terms. Information, as the effectiveness and performance of a worker, is needed today to calculate the costs in every processes and procedure in a company (Miller 1996). Target Costing targets a cost per unit- (Harvard Business School, 1997) and A, B, C costing systems costs assigned provide the performance and how much an object or activity consumes during a certain period of time, to perform its objective- (Marx, 2009) are a modern view of managing costs in an organization. Throughout the document further explanations will be provided, as Toyota performs under the first method and could develop improvements with the second.Structurally, costing has a very important role regarding Price strategy in Toyota and every organization. This is, because according to Griffin (2013), in an article she wrote on Chron.com, pricing strategy has three main contents: Cost and profit objectives

Consumer demand

Competition

Companies, entities, sellers, all must have these concepts in mind when trying to figure out a price. Take in mind that all costs and expenses (manufacture, financial, administrative, etc.) must be added up and compared to sources of revenues. Also, factors, such as competition, customer and demand must be taken in account to calculate a price that fits your desirable profits. (Griffin, 2013)Pricing can be based in different criteria, according to what the organizations objectives are and how they plan to achieve them. Having this in mind, pricing could be cost-based, demand-based or competition-based. In cost-based pricing, prices are base don costs during the production chain and profit the company expects to have with every unit sold, but it doesnt have the demand under consideration. In demand-based pricing, an organization can determine profits and costs within a range of price made by research of a certain customer basis. In competition-based pricing, prices are based on competitors existing market prices (Griffin 2013). As it can be inferred, in every price settlement situation, cost is essential. In Toyotas case, they have many products worldwide, and their price strategy depends on the customer segment they are aiming, so every product has a different price.1.2 Costing system for use within an organization and how can it help in minimizing the cost for ToyotaThe system used by Toyota has the objective of reducing product cost in a certain stage of the production process, more specifically, the design part. Its called target costing. The design then was changed several times to adjust a cost reduction in the interest of the company and would fulfill their goals that were set for the purpose of this system. Material and labor prices were kept in mind while creating this model (Harvard Business School, 1997).They measured various factors that contributed to the accumulation of costs and tried to reduce them by re-designing new models in order to achieve their optimized goal, or cost-planning goal as they decided to call it. These specific factors are: labor, materials, depreciation, and production volume helped to define this last one. All these data was recollected and saved to be compared with the newly designed models and see how close they were to their target and what solutions could they find next to accomplish it (Harvard Business School, 1997). This also helped to make a comparison between the profits they made in each event and make sure that profits werent affected in a way they could be decreased, and also define the difference between the cost between current and new models and consider the results (Harvard Business School, 1997).The cost reduction at each stage of the production process was controlled so that the overall objectives were achieved. This means that the company was definitely settled to perform a low-cost strategy as their way of competition and all these goals and targets were stated in the budget control they made (Harvard Business School, 1997).Estimated costs are used as the element of comparison to the target costs that are considered as great view to the future, in other words, as a long-term plan. The system helped to define stages of the production process that could have cost reductions and adapt it to the budget, as it was mentioned before, and it was created to estimate the cost of new products and also to foresee target profits of new models (Harvard Business School, 1997).

This system is similar to the Activity Based Costing (A, B, C) system which focuses on activities as the basic cost objects and uses the costs of these activities as building blocks for compiling the costs of other cost objects (Marx, 2009) The use of the activity based costing system provides many advantages regarding different activities within a company, in this particular case, to Toyota. According to Marx (2009), the activities that are benefited from the implementation of this system are:

Activity based costing

Activity based cost management

Activity based budgeting

Activity reporting

Performance measurement and benchmarking

Continuous improvement

Product/customer and sector profitability

Business process re-engineering1.3 Improvements to the costing and pricing systems used by Toyota Motor Corporation (PLC)Improvements to the costing and pricing systems used by Toyota can be achieved by a Design of a Performance Based Costing (PBC) system. This is a technique that is focused on performance, at any level. This means to concepts of finance and non-financial. This provides more accurate information than the traditional system (Gunasekaran et.al, 2005).The fundamental objective of this system is to calculate direct costs in the areas that produce value to the company (Toyota) in its production. This involves factors such as direct labor, direct materials, among others, so a total product cost can be estimated. The accuracy of product cost depends upon the costs of value creation areas and corresponding drivers (Gunasekaran et. al, 2005).

Therefore, this system can provide more accurate information for Toyota than other systems (like the traditional one), resulting in a more precise estimation of a total product cost.

Figure 1 below, taken from Gunasekaran, et. al (2005), shows the series of steps in this system. This process is very specific and has determined guidelines to help the connection between each step develop the systems purpose. First the objectives must be identified to have a clear picture of the direction the system will follow to achieve its objectives. From this, the development of the system and analysis through drivers, costs and value areas will help to establish a system that will best suit the interest of the organization, to finally define it and implement it.Figure 1.

Source: Gunasekaran, A. et.al, 2005.

2. Task 2.

2.1 Forecasting techniques to make cost and revenue decisions in an organizationForecasting is an essential tool for managers, governments and companies to visualize what the future look like in terms of defining risks, operations, opportunities or possible encounters that they may face. According to Dave Yost, Auditor of the State of Ohio, USA, in the financial area this technique should be monitored and updated regularly, for it to help in decision-making solutions, by having the following advantages:

Develop an understanding of available funding

Evaluate financial risk

Assess the likelihood that services can be sustained

Assess the level at which capital investment can be made

Identify future commitments and resource demands

Identify the key variables that cause changes in the level of revenue and expenditures

There are two approaches to develop forecasts. These are: Quantitative and qualitative. Companies may collect the following data, regarding to the method they decide to implement for their forecast, according to Yost (2013):

QualitativeA. Judgmental (Purpose: Forecast is based on evaluation)B. Consensus (Purpose: Forecast is based on group decision)C. Expert (Purpose: Forecast is based on advice from expertise on a specific area) Quantitative

A. Trend Analysis (Purpose: To Compare historical information)

B. Multiple Regression Analysis (Purpose: The use of acknowledged factors determine forecasted change)C. Time-Series Analysis (Purpose: To determine the average change in specific time periods)

Figure 2 shows a forecast based on growth of different accounts in an income statement. These figures from the periods 2010- 2012 were taken from Toyota Global (2013), however, the percentage growth is a simulation made to carry out the exercise. The simulated growth percentages help to develop the expectations for the year 2013, highlighted in yellow. In this case, the Figure 2 shows an example of a Time-Series Analysis to demonstrate an illustrated forecast.Figure 2.

2.2 Sources of funds available to Toyota Motor Corporation (PLC) for a specific projectAccording to Finance for Marketers (1997), a text found in the FAO Corporate Document Repository, there are several ways in which entities, companies or organizations can Access new funds. These are:The capital markets

The capital (stock) markets Loan Stock

Bank Loans

Government Sources

Leasing

As Toyota being a multinational and developed company that has the ambition to expand, participation in the capital (stock) market will make new investors to purchase shares of Toyota, according to the performance and development of the company. Currently, Toyota has been having issues with recalled vehicles, which has put in doubt their reputation and has made an impact on their sales (CBC News, 2012).

3. Task 3.

3.1 Appropriate budgetary targets for an organization and how a budget can be used to set targets and measure the performance of ToyotaToyotas budgetary system is very particular and unique. This is, because it has several factors that differentiate it. According to Tanaka (1994), these are:

Emphasis on variable costs. Budget goals involve variable costs. These are to be reduced through continuous improvement. Many cost centers. Indirect costs are not assigned to products.

The budgeting system supports a matrix organization.

The budgetary system in Toyota helps management to aim, with anticipation, for short and long-term targets, regarding profit, sales, lowering costs, among other factors. Budgeting in Toyota has factors to consider such as variables and fixed costs budgets. Figure 3, taken directly from Exhibit 1 of Tanaka (1994) explains in detail how the budgetary system of Toyota works. It shows hoy profit targets (long and short-term) affect costs to develop budget and further comparison among them.Figure 3.

Next, is Figure 4, which shows elements of the Income Statement of Toyota from 2010 to 2012. A change in an average budget for sales and costs is presented, which affects directly the net income account. As Figure 2, it shows a simulated scenario, proving how a budget can be fully used or not, and how it may improve the distribution of budgets according to an activitys needs. (Source of information of Figure 4: Toyota Global, 2013). In this case, the budget disposal is the limit made by the company on how much an activity may cost. Highlighted in grey, is the final amount used for each account in the year 2013. Thus, the Difference Used is the difference between the Budget Disposal and the amount used in 2013 in each account.Figure 4.

3.2. Master Budget for ToyotaThe master budget is an overall budget that involves all other budgets in a firm and its usually planned for the whole fiscal year (Peavler 2013). According to Peavler (2013), a master budget has two main parts, which are: Operating budget: Creates a budgeted income statement, showing income-generating activities. Financial budget: Creates a budgeted Balance Sheet.Figure 5 shows a part of an operating budget of a master budget for Toyota, as an example to explain how it works. As in previous illustrative examples, the figures for the years from 2010-2012 were extracted from the income statement of the company, while the budget and result for 2013 are simulated to carry on the exercise. The Figure shows a Budget created for 2013 is created following the amounts spent or consumed id the previous years of these specific accounts. From this, a forecast made for the year 2013, helps to illustrate how the amount spent was limited by the budget for the Sales of product and Cost of products sold, but the Cost of financing operations clearly exceeded this limitations.Figure 5.

3.3. Comparison of actual expenditure and income to the master budget for ToyotaA comparison of the actual expenditure and income to the master budget created previously will help to clarify what was mentioned earlier, about how much was spent identifying if the budget is insufficient and needs to be extended or if it can be simplified. Figure 6 shows this comparison, illustrating that the difference of the budget made for each account and what was used is highlighted in red.Figure 6.

3.4 Evaluation of budgetary monitoring process of Toyota Motor Corporation (PLC)Tanaka (1994) explains that there is a concrete budgeting and manufacturing system for Toyota, and that both correspond to the Total Quality Control (TQC) achievement that they have reached. This is based on the culture implemented in the company, known as Kaizen, which means continuous improvement. He also refers to a very important term to understand the mentality of the company; this is Kanban which refers to the productivity ideal of Toyota; it means just-in-time manufacturing (Tanaka, 1994).Tanaka (1994) makes a complementary adjustments to the fact that Toyotas is not only constructed on target costing, but on cost control and kaizen as fundamental factors. This is a very unique mix and vital for the culture of Toyota. Tanaka (1994) states that this system provides advantages in four specific concepts. These are: Senior management has the responsibility for making a profit and budget management.

Eliminates unfair performance evaluations.

Kaizen is easy to understand, which is a factor of motivation. It determines the objectives of the company and employees.

High standards are required in every part of a process that is carried out. These have helped Toyota to achieve a good reputation due to the quality of their products (nonetheless, there has been some problems in the past years and a great amount of recalls have been made worldwide). Also, these particular features of Toyotas budgetary system provide the upper management a clear vision to plan in advance for the future.

Cost control in Toyota involves the concepts of target costing and kaizen budgeting (explained earlier in the document). Board members gather in what are called councils for a conglomerate of cost and budgeting controls, which result in strategic decisions (Tanaka, 1994). The consensus by the councils been the monitoring in Toyota so far, but these controls may also be more effective if supervisors, in each step of production, keep a documented transcript following each cost and performance of their activity and, because they have more knowledge in the specifics of the processes made constantly than upper management that mainly makes strategic decisions, supervisors may help to lower cost with new alternatives and with not much burocracy and slow decisions. 4. Task 4.4.1. Processes that could manage cost reduction in Toyota Motor Corporation (PLC)Globalization and economical changes have made a great impact on the automotive industry. According to Oetinger et. al (2002), companies need to focus on developing five critical capabilities, in order to reduce costs. These are: Supply Chain Planning

Agile Manufacturing

Trading Partner Collaboration

Sourcing and Procurement

Administrative Cost ReductionTo reduce costs, many factors have to be considered and Toyota does not have control over some, which makes it hard to do so. These factors depend on the implementation of a solid manufacturing process. Toyotas been trying to reduce cost as a strategy to compete, but its difficult to find innovative ways to do so when they are out of Toyotas ability to achieve these cost reductions (Wikinvest, 2007).

Toyota has continued to reduce costs and improve on performance. According to Wikinvest (2007), one of these measures is the reduction in the number of platforms used in vehicle production. These make unique structures to the models they are designing. They have been trying to re-use the platforms for different models, lowering the costs of bringing and using more platforms, instead.

Toyota must make an internal analysis and see through the techniques revised through the document, how to lower costs by liquidating any repeated process or simplifying it in a way that the final product is not affected in its quality. Also, expenses in administration and finance may be controlled in a budget so that they stay fit to a certain limit, without making that the net profits also decrease. A system is worthless when a reduction of costs is taking place but the profits are also decreasing. The integration of processes is essential to reduce costs in todays business world. 4.2 Evaluate the potential for the use of activity based costingAs explained at the beginning of the document, Activity Based Costing (A, B, C) system focuses on activities as the basic cost objects and uses the costs of these activities as building blocks for compiling the costs of other cost objects (Marx, 2009).Its important to mention that this system, the costs are given to the different activities throughout an organization, due to the way the resources are being used. Afterwards, the purpose of the system is to unite all the costs that were assigned to the different activities to form a final product cost, giving an accurate estimation on how each activity affected the production (Marx, 2009). The use of the activity based costing system provides many advantages regarding different activities within a company, in this particular case, to Toyota.

Activity based costing provides the necessary information for managers to make better decisions and brings acknowledgement in to which activities use resources and how much they do. This can be used to improve performance in companies (for instance, Toyota) and understand why activities occur and simplify processes if necessary to reduce costs.

5. Conclusions

Toyota has been trying to reduce their cost by their unique system of Kaizen. This involves target costing as well. A, B, C Costing system has proven to be of great benefit if implemented properly. Different scenarios, using actual figures from Toyotas financial statements were made to prove concepts such as forecasting, budgeting and variance.The company needs to develop innovative ways to reduce costs without forgetting about the quality of their products and their sales. As seen through the income statement, they have achieved to lower costs but they have decreased their sales as well. To succeed new elements have come to mind using integrated costing systems.6. ReferencesGlobalization of an existing Business. MBA Acknowledge Base (2012) [ONLINE] Available at: http://www.mbaknol.com/international-business/globalization-of-an-existing-business/. [Accessed 06 May 2013].

Yost, D. Planning & Financial Management Financial Forecasting (2013). [ONLINE] Available at: http://skinnyohio.org/planningandfinancial/financialforecasting.html. [Accessed 06 May 2013].Gunasekaran, A. et.al (2005). Performance measurement and costing system in new Enterprise. Volume 25, Technovation. Pp. 523-533

Cooper R, Kaplan, R.S. (1991). The Design of Cost Management Systems: Text, Cases, and Readings (Robert S. Kaplan Series in ManagementPrentice Hall College Div.

Miller, A.J. (1992). Designing and implementing a new cost management system. Cost Management December. Pp. 4153

Tanaka, T. (1994). Kaizen budgeting: Toyotas cost-control system under TQC. Journal of Cost Management. Volume 8, issue: 3. Pp, 56-62

Harvard Business School (1997). Toyota Motor Corporation: Target Costing System. Griffin, D. Pricing Strategy Theory. Chron.com (2013). [ONLINE] Available at: http://smallbusiness.chron.com/pricing-strategy-theory-1106.html. [Accessed 07 May 2013].FAO Corporate Document Repository. Basic Finance for Marketers (1997). Agriculture and Consumer Protection. Available at: http://www.fao.org/docrep/W4343E/w4343e08.htm. [Accessed 07 May 2013].

Marx, C. Activity Based Costing (ABC) And Traditional Costing Systems Business Consulting Services (2009). [ONLINE] Available at: http://financialsupport.weebly.com/activity-based-costing-abc-and-traditional-costing-systems.html. [Accessed 11 May 2013].

Consolidated Statements of Income (2013). Toyota Global. [ONLINE] Available at: http://www.toyota-global.com/investors/ir_library/annual/pdf/2012/p77_81.pdf. [Accessed 14 May 2013].

Oetinger, D., Abraham S., Gahan, K., Hebeler P., McGlynn J.P. and Perkins B. Oracle (2012). Achieving Continuous Cost Reduction in the automotive industry. [ONLINE] Available at: http://www.oracle.com/us/industries/automotive/038860.pdf. [Accessed 14 May 2013].

Cost Reduction for Toyota Motor (TM). (2007). Wikinvest. [ONLINE] Available at: http://www.wikinvest.com/stock/Toyota_Motor_(TM)/Cost_Reduction. [Accessed 14 May 2013].Peavler, R. Budgeting What is a master Budget? (2013). [ONLINE] Available at: http://bizfinance.about.com/od/businessbudgeting/qt/budget-planning-what-is-a-master-budget.htm. [Accessed 21 May 2013].Toyota recalls 2.77 million vehicles World CBC News. (2012). [ONLINE] Available at: http://www.cbc.ca/news/world/story/2012/11/14/toyota-recall.html. [Accessed 21 May 2013].PAGE 22