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Target Costing - Nissan

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Vili Paraskov

on 28 November 2012

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Transcript of Target Costing - Nissan

Vili Paraskov, David Luttrell, Nino Cabaravdic, Kyle Fox Nissan Case Study
Target Costing Case Overview What is
Target Costing?
Product cost is determined by market price

Management tool designed to reduce a product's cost over its lifetime

Long-term profit planning

Necessity of supplementary costing techniques to lower product costs Nissan's
Costing System Is Target Costing
Transferable to US Companies? Currently every US Auto Manufacturer is using some form of Target Costing
At the time of the case this was not true

Dodge was the first US Manufacturer to turn to Target Costing
Adopted Balanced Scorecards to create the Dodge Neon The Case:
Analyzing Target Costing in Nissan
Changes & Recommendations
Impact on US Manufactures

The Company

The Industry Weaknesses Increases product development costs

Encourages short-cuts in engineering processes

Increases time to market

Product costing prediction efficiency lessens over time
"Trying to hit two moving targets at the same time" Strengths Encourages company division and supplier interaction

Encourages Innovation

Enhances costing control at each step of the products life-cycle

Improves probability of meeting product
life-time profitability The Industry Toyota & "The Big 3" - Ford, GM, Chrysler
Competition Based on:
Product Variety
Transaction Prices
Time of Change as foreign competitors began to take market share and knock down barriers to entry Nissan Founded in 1933

By 1990 - 4th Largest producing over 3 million vehicles (10% world demand)

Most Globalized of Japanese companies
36 plants in 22 countries
Marketing in 150 countries through 390 distributors and 10,000 dealerships
2nd in Japanese Market (25%)

Current Standing:
4.84 million vehicles
World - 6.4%
Japan - 13.8% Full Costing System

Direct Costs are traced
directly to the products

Direct Manufacturing Costs
Manufacturing Supplies
Machine Depreciation

Indirect Manufacturing Costs

Corporate Expenses Nissan's
Costing System Four primary uses:
1) basis for estimating future profitability in long-
range strategic plan

2) cost-control purposes, ensuring that across the
production life of product its target cost is maintained

3) help select product-mix

4) identify unprofitable variants that are candidates for
discontinuance Nissan's
Costing System Yes Nissan will be able to support the system because most costs are traceable

Of Total Manufacturing Costs:
85% are directly traced to products

10% charged to production departments then to products

5% service and administrative costs Nissan's
Costing System The Nissan Cost system is continuously undergoing modification, to move towards even better support of Target Costing needs to:

Focus on tracing costs directly to product

Use appropriate allocation bases

Increase visibility and collaboration with parts and service suppliers to reduce costs Negative for Nissan because it eliminates value based pricing
Takes resources (Time and Money) away from other priorities
Creates false link between Price and Cost Moving away from Lean Accounting and switching to Western Methods
ABC Costing
Cost Plus Pricing Possible Changes Recommendations Kaizen - continuous improvement
Every component even if already under budgeted
Continual Innovation

Shorting Production Development Time frame
Empowering and aligning entire workforce Dodge was having quality issues along with huge financial troubles at the same time

Turned to Target Costing and adopted Nissan's approaches and development processes
Allowed cost cutting by looking at whole production process
Lowered component and development costs

Total Result was the first profitable US Compact Car Cost of developing new vehicles was and continues to be very expensive

Quality was a problem associated with US Compact Cars
Chevy Vega
Ford Pinto US Auto Manufacturers "Tiny Car,
Tiny Profit" Henry Ford II
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