Company Overview
Toyota Motor Corporation is a multinational automotive manufacturer based in Japan. Toyota, as it is commonly referred to, is headquartered in Toyota City, Aichi. According to Njuguna (2022), “in 2008, it surpassed General Motors to become the largest automaker in the world for the first time” (p. 1). Many of the corporation’s 1,000 subsidiary affiliates and businesses engage in commercial and industrial vehicles,’ autos,’ and auto parts manufacture.
The corporation was founded in 1933 by a Japanese manufacturer called Toyoda Kiichiro (Njuguna, 2022). The first car that the company produced was in 1936, and it was known as the Model AA sedan (Alonso, 2023). Over the years, the company has been making significant efforts to offer automobiles that meet customer tastes and preferences. According to Alonso (2023), when Toyota surpassed Volkswagen Group, it became the world’s largest car manufacturer, having sold approximately 9.5 million units by the end of 2020. In addition to production, Toyota further assembles automobiles all over the globe.
Costing Methods
Job Order Costing
The first costing method considered in this paper is job order costing. Manufacturing companies often adopt job order costing to determine the cost of each product they produce(Špacírová et al., 2020). Manufacturers often adopt this costing method when producing a large number of products that are significantly different from one another. Since Toyota Corporation produces various types of vehicles with distinct customization and specification options, it can utilize this method (Alonso, 2023). For instance, the company offers customers various trim levels and optional features.
Process Costing
Process costing is another costing method used by various firms. This costing procedure is employed in the manufacturing industry to determine the cost incurred by a company to produce each unit of a product in specific sectors (Špacírová et al., 2020). This method can be applied in Toyota’s assembly line production process, where each car must go through many stages and departments that accumulate costs. It can help Toyota determine its average cost per unit within a given period.
Cost Differences When One Method Is Chosen
Choosing one method over the other affects Toyota’s cost identification. For instance, when Job order costing is chosen, Toyota will have a more detailed view of costs, allowing its executive team to accurately price its products and analyze its profitability (Špacírová et al., 2020). However, this method needs more administrative efforts for tracking and allocating costs. On the other hand, process costing reduces administrative overhead and simplifies cost allocation (Špacírováet al., 2020). It will give Toyota a broader perspective on the average costs of vehicles.
Factory Overhead
The possible indirect and overhead costs of the Toyota Company include factory rent, utilities, maintenance, and repairs. Toyota can apply activity-based costing to expenses such as factory rent, utilities, maintenance, and repair costs (Špacírová et al., 2020). In this method, Toyota will identify activities that contribute to the increase in these two costs. This will help the firm allocate more accurate costs and avoid shortages. The activity bases (cost drivers) for factory rent and utilities are machine hours, and maintenance and repairs are measured by the number of maintenance requests from different departments.
Recommendation
Based on the above analysis, the costing method that Toyota Corporation should consider is activity-based costing for factory overhead costs and process costing for the production of standard cars. ABC is a costing method that assigns indirect and overhead costs to an organization’s products and services (Quesado & Silva, 2021). By implementing ABC, Toyota will be able to allocate the costs of factory activities accurately. On the other hand, adopting will allow Toyota to allocate costs and make informed pricing decisions more efficiently (Špacírová et al., 2020). This is because it aligns with the firm’s high production volume of standardized cars.
References
Alonso, T. (2023). How Toyota went from humble beginnings to automotive giant.
Njuguna, M. (2022). Numbers don’t lie: How Toyota became the world’s leading automotive company.
Quesado, P., & Silva, R. (2021). Activity-based costing (ABC) and its implication for open innovation. Journal of Open Innovation: Technology, Market, and Complexity, 7(1), 41.
Špacírová, Z., Epstein, D., García-Mochón, L., Rovira, J., Lima, A. O., & Espín, J. (2020). A general framework for classifying costing methods for economic evaluation of health care. The European Journal of Health Economics, 21(4), 529-542.