PGDM E-Biz

Pranai Mehta
Roll No : 44

Strategic Cost Management

Assignment

1. What is the competitive environment that creates the range of products sold?
 Sophisticated Japanese consumer and lean enterprise shape the competitive environment.
 Toyota has approximately 45% and Nissan has approximately 25% of market share, followed by
Honda and Mazda (20% together)
 There was no brand loyalty.
 Continuous improvement in functionality at the same cost and products engineered around
concepts that offer customers automobiles that matched their lifestyle was the strategy used by
Nissan.
2. How does Nissan determine its future product mix?
 Nissan determines its future product matrix using 3 models:
 Product matrix: to achieve market coverage and decide on the product mix for the next 10 years
 Matrix helps identification of body types and models that appeal to a specific group of target
customers
 Consumer analysis: determine attributes valued by customers
 Helps determine new entries in its product matrix
 Mind-sets: How customers visualize themselves in relation to their cars
3. Describe Nissan’s cost system. Is it strong enough to support its target costing system?
 The production cost system in Nissan’s which basically divides the cost into two subjects; direct and
indirect expenses.
 Three different product profitability were calculated as well, where the 1 st was the direct material
marginal profit, 2nd 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.
 Yes, Nissan will be able to support the system because most costs are traceable.
4. What is value engineering and how it is used in Nissan?
 A value engineering process examines the design of each component to determine whether
it is possible to reduce costs while maintaining functionality and performance.
 The concept of value engineering was used in all the 3 stages of new product development by
Nissan to keep a check on the price at every level and rectify it there.
1st stage of value engineering was to determine if the product can be manufactured under
acceptable profits. Allowable costs were kept low to adjust current manufacturing cost
2nd value engineering identified allowable cost at each major function.
3rd value engineering was used to identify allowable cost at each component level.
5. What is target costing?
 Product cost is determined by market price
 Management tool designed to reduce product’s cost over its lifetime
 Long-term profit planning
Target cost was identified as the difference between the target selling price and the target margin.
 PGDM E-Biz
Pranai Mehta
Roll No : 44
6. What is the relationship between value engineering and target costing?
 Target cost is focused on setting the cost
 Value engineering is to achieve and maintain that target cost
7. What role the consumer play in the target costing system?
 Role of Consumer is to obtain a better idea of the price range over which the model would sell and
the level of functionality that the consumer expected.
8. How does Nissan determine the target margin for a new product?
 The target margin was determined by careful consideration of available information on the
consumer, the firm’s anticipated future product mix, and its long-term profit objective.
 Each new model’s target margin was established by running simulations of the firm’s overall
profitability for the next 10 years if it was selling the models identified in the product matrix at
expected sales volumes.
9. What role does profitability play in the target costing system?
 Profitability plays a very important role in target costing system as it allows to discount the selling
price to arrive at the product price.
 Target cost is derived because sales and profits are fixed and profits are fixed as part of sales and
hence if sales are achieved, profits must follow.
10. What is the role of suppliers in target costing?
 With 70 percent outsourced components, suppliers play a critical role, they are the partners.
External 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.
Suppliers were asked to generate cost reduction ideas.
 An incentive plan was to motivate the suppliers in the form of regular orders
11. Why is accounting role so limited?
 Accounting is not involved in the core value engineering process and only monitors the final
cost if it is not exceeding the set target.
 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 was not being met.
12. Why there is no attempt to reduce cost of a vehicle after it enters production?
13. What barriers exists for introducing target costing into western companies?

14. What approaches can be used other than target costing?

 Moving away from lean accounting and switching to western methods like ABC costing and Cost-
plus pricing.