Toyota has established itself as one of the most competitive car-makers brands globally.

The Toyota Production System (TPS) has assured it delivers high quality products as well as high production efficiency. As the company took on its ambitious plans to grab a greater market share and take over its rival General Motors, it pushed too far to squeeze costs. After a point, it started to affect the quality of its products. In this paper, we look at the case of Toyota recalls and trace it back to the basic concepts of management accounting.

Toyota was able to achieve significant economies of scale in the small car segment. It had what is called first mover advantage in this segment. This could also be referred to technological leadership in Toyotas case. This advantage came up from the resources that Toyota was able to gain that its competitors couldnt match. On the other hand the American car companies are now suffering from a first mover disadvantage. Since these companies were using dated production methods and equipment, they needed huge investment to revamp their old plants and adapt the new technology like Japanese car maker was using. Besides, Toyota priced its products to cater to lower to middle class customers.

Toyota had an overall organizational involvement in its cost management process. The roles for various functional departments were defined and distributed. The finance department plays more of a co-coordinating role. It assigns the target costs to other functions and sub functions in the organization. It also oversees the performance across the business and manages reporting and promotes target achievement. It can call for action incase of variations. The sales department drives the target costs. The purchase function analyses components and looks for areas of saving costs. The engineering department uses value engineering method to look for saving costs and at the same time maintain the product functionality. And finally, the manufacturing function looks at process improvement for reducing costs. The TPS is characterized by just-in-time production (kanban system), and the workers decision making capability (jikoda). It enabled the company to reduce cost per vehicle by implementing set of ideas systematically across the organization. Just-in-time

manufacturing system works on a demand-pull basis, which means that the product quantity that is manufactured at a point in time is dictated by exactly what is required at that point. This type of production system leads to cut down in inventory and thereby inventory space.

Cost management system at Toyota helps them improve processes and activities, control costs and measure their performance. It is an important tool that allows the organization to pursue its strategies. Toyotas cost management system is highly defined. Toyota follows management by costing method. It has two main phases, the target costing in design stage and kaizen costing in production stage. The target costing is the process that defines the cost using following equation: Desired cost = sales price target profit

In this approach the top management decides the sales price and target profit per vehicle based on cars features and the market price. This is proposed by the sales division on the basis of their consumer analysis. The desired cost hence achieved is passed on as the target cost and the next course of action is decided in a way that this becomes attainable. Further, steps are taken to reduce it in the production stage. The production engineers decide a standard time for producing parts of the vehicle and then the complete vehicle itself. The cost incurred during the process was set as a referential cost. These two parameters varied in different production lines and decided the efficiency of each.

The kaizen was applied when the above parameters needed to be met or improved. Kiazen has been defined as one of the core values of the company. It is implemented throughout the organization in various ways as needed. For example, once a plant peaks its efficiency, the number of workers there are reduced slightly by the management. This leads to decrease in efficiency, and then kaizen is introduced to help achieve the previous level. They also organize Kaizen teams, which learn and improve by staying together for longer periods of time. These teams are created in various

production areas. This method helps in locating the sources of errors which leads to their elimination.

It is evident that with the use of its cost advantage strategy designed in the form of TPS, Toyota invaded the U.S. market. The TPS clearly used less space, lesser engineering hours and lesser investment tools compared to American competitors. The company used lean production methods which involves building up of small batches of cars using the approach built on problem solving as well as quality. The company gave its dealers 18-20% profit margin in US as opposed to its American competitors who gave only 1213%. It helped the company establish a strong dealer network across the country.

Another important feature of TPS is measurement of its production efficiency and production allowance. In simplified terms, the production efficiency (PE) of Toyota is calculated as : Production efficiency = (standard time) X (production volume) Real working hours of working group

The production volume consisted of number of products without defects. Not factoring in defects increased the standard time per vehicle and decreased the production volume driving down the PE value. The monthly wage for its employees was calculated by adding up basic wage, production allowance and the overtime payment. The production allowance was linked to PE of the production line in which the employee worked. This system worked for fourty years in Toyota, before crashing in 1980s, when the demand for vehicles surged dramatically. The current production process wan not enough to cater to the growing demand.

The famous principles of TPS laid foundation for Lean. Though it is called a production system but actually it is an idea of business system. It can therefore characterize Toyota

Business System. The principal that goes behind this framework is that a company should focus on creation of high value and quality for customers and also create high value system for the organization as well. A lean system aims to create coherence in business systems like JIT systems, quality and supplier management, work teams among other management practices. On creating synergies between these practices, high quality products can be obtained with minimal or no waste.

A series of changes and improvements were introduced by Toyota, some of which were later speculated as bad decisions made by the company. Particularly, mass hiring of temporary labor to meet the fluctuating needs of production was regarded as mistake. This has a direct bearing on the quality because the competence of the temporary worker, in general, doesnt match a trained permanent worker.

The company faced a series of recalls amounting to roughly 9.5 million cars after 2000. The company clearly has very low labor costs. It started employing temporary labor in 2000s when there was a fluctuation in demand. The company also launched its aggressive initiative during the same time period. It was called CCC21 i.e. Construction of Cost Competitiveness for the 21st century. It was a highly ambitious plan aiming at reducing the production cost of a new car by 30%. This pressurized the engineers heavily to assure sufficient quality standards in their products. Toyotas aggressive growth strategy developed an environment of risk that after a point in time became unmanageable. As the management goes on a risky path, the board of directors steps in as a check point. They ensure the companys decisions and strategy are based on an overall assessment of the options presented before it. In this case, the diligence exercised by them is questionable. The defects in Toyota's cars resulted in vehicles crashing causing deaths in some cases. Recalls were imperative in this case where multiple systems were affected. Since the number of recalls was large so was the cost. The cost mainly included the following:

Repair Costs: The costs incurred to fix the defect. They could be small per vehicle for Toyota, but they are definitely not insignificant given the number of units recalled.

Legal Costs: The lawsuits filed by consumers, calls for a big expense. Since the severity of the damage had to be addressed, the company set aside a large chunk in terms of legal liabilities. Also, public apology statements issued through advertisements on TV and in print media added to the cost burden.

Image Costs: Brand value is one of the most important assets a company has. It affects the company not only in terms of lost sales but also entails opportunity costs. Toyota estimated that it lost USD 770-880 million (approx) in terms of lost sales after the recalls. Toyota accepted responsibility for its products defect and did not pass the buck. It called in mass scale recalls, thus showing a good conduct and keeping up its brand image. From the point of view of issue intensity, the matter was grave. There were many deaths and serious injuries. The delay in addressing the issue saved them millions of dollars. It was totally unethical on the part of the company to show this kind of behavior. Moreover, the organizational structure is such that information takes time to cross different levels to reach the top management. This might also lead to miscommunication of the problem as it has to pass through various strata before reaching top management. Toyota needed to compensate fully the people who were most gravely affected by the defects. They did not distribute costs and benefits equally i.e. employees and managers who are responsible should be taken to task for their negligence. The company can improve its performance by involving employees more in the quality management process. Toyota also violated right to human safety by providing unsafe cars to its customers, which is another ethical violation.

According to Integrative Social Contracts Theory, managerial and business decisions can be made with respect to their impact on relevant communities, ethical norms and possible universal moral standards. There is a clear mention that companys top US executive warned his bosses in Japan that vehicle quality was slipping but it had no bearing on them. They ignored the impact of their actions to the larger community. Toyotas supplier relationship was strained because of its cost saving strategy CCC21, which was aimed at achieving cost reductions at a large scale. This meant purchasing cheaper components. This put great pressure on cooperative partners of the company. suppliers has to accept order quotations by Toyota in order to continue their relationship with the company. Else, the contracts will go to other overseas suppliers. It was

damaging the overall quality of the products, since the company was blindly pursuing lowering costs. Also, it was making it difficult to monitor quality and keep it in control. In 2005, Toyota came up with a new cost reduction method called Value Innovation (VI). The pillars for this were cost and human resources management. But unlike the previous methods of improving design and production process of each part, this one talks about simplifying the production process by integrating the parts in the beginning of a design stage. It changed its production efficiency management and wage systems significantly in 2000s.

References : Target costing in the NHS, October 2005, http://www.cimaglobal.com/Documents/ImportedDocuments/ReformingtheNHSfromwithi n.pdf How Toyota uses kaizen for efficiency, July 2012, http://businesstoday.intoday.in/story/toyota-kaizen-methods/1/186340.html Just-In-Time Manufacturing, http://www.tutorialspoint.com/management_concepts/just_in_time_manufacturing.htm

Integrative Social Contracts Theory, http://www.ehow.com/about_5431829_integrative-social-contractstheory.html#ixzz2NnUmojDH The Cost Of An Auto Recall, February 2010, http://www.investopedia.com/financialedge/0210/the-cost-of-an-auto-recall.aspx#ixzz2Nj9PvK8W Toyota Recall: Five Critical Lessons, January 2010, http://business-ethics.com/2010/01/31/2123-toyota-recall-five-critical-lessons/ The Role of Management Accounting Systems in Implementing Lean Business Strategies, May 2011, http://oaithesis.eur.nl/ir/repub/asset/9213/M648Bahadir_282911%20(2).pdf

The second automobile revolution, http://www.izt.uam.mx/sotraem/Bibliografia/Shimizutheuncertainty.pdf