Activity Based Costing

Activity Based Costing

Company Overview

One of the largest manufacturers in the auto industry with the annual sales of 7.4 million units in the five continents of the world is the Toyota motors. Toyota's sustaining and improving quality commitment with its potential customers helps the company to be on number one position in the world. Toyota occupies a leading position in the market Auto Asia, has the unique advantage of being the best Japanese brand sold in the United States and to be number one in Europe.

The story of Toyota begins at the end of the 19th century with the invention of the first Sakichi Toyoda automatic loom in Japan, a machine that helps to revolutionize the textile industry countries. The company's outlets and the manufacturing units are spread all over the world.

Outside Japan, Toyota has begun to conquer foreign markets in the 1950s. In 2004, annual sales of Toyota vehicles in the United States will exceed 2 million, including 1.4 million vehicles and nearly 1.36 million engines manufactured in the United States. The first European imports were made in Denmark in 1963 and since that date, the company has grown steadily in the market for sophisticated and complex motor Europe Toyota has been continuously denying problems that are associated with the throttle system control on their vehicles regardless of numerous investigations by the government on the safety issues with their vehicles. Many newspapers reported against the sudden acceleration problems which has been impacting on the Toyota sales and affecting the popular car status. However, around 37,900 reports of customer claim regarding the unintended acceleration, speed control and surging problems have been searched and discovered across many models.

Costing system adopted by the Toyota Company

As Toyota 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 through product line wise. 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.

The 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 (Adkins, 2006).

Merits of Activity Based Costing

Activity Based Costing (ABC) System serves as an alternate to the company's usual costing system. It provides manager with a helpful tool that aids in making strategic decisions and controls the fixed costs. ABC costing system is especially helpful for decision making that directly affects the ...