When management accounting is implemented to the new vehicle launch, the main idea is to increase the cost consciousness level of engineers and provide cost information that supports decision-making situations during the project execution. The project controller should be considered as a key person in this. The controller should collect financial data from the internal and external reference groups and monitor the committed costs of the future product together with the project manager. Furthermore, project controller is also the person participating to the financial evaluation of the product life cycle. Furthermore, this information can then be used to support future projects.
When launching a new vehicle (or car), management accounting is even more important. It can support at every stage, from initial planning right through to execution, by giving a detailed breakdown of production capabilities, as well as an accurate picture of the market as a whole. This is crucial for working out how much you'll charge for a new product, the quantities of product you will make and whether or not it is worth bringing in extra staff to help deliver.
IMPLEMENTING MANAGEMENT ACCOUNTING INTO THE AUTOMOBILE LAUNCH- PROCESS
1. Strategy and concept definition phase
This phase involves five stages and it starts with strategic project planning and ends with the selection of a single vehicle concept and agreement on the accompanying business case and feasibility. The phase is informed by an ongoing market monitoring system that benchmarks the pedigree, performance, price and service expectations of existing and potential customers against those provided by ABY and its competitors.
2. Concept approval phase
In this phase additional customer and market research is undertaken, targets are defined more precisely, assumptions are checked and the business case confirmed. The design model is detailed further to a stage where the concept is approved by both the ABY and group product strategy committees. This phase is an important part of the risk management and strategy implementation process.
3. Design and validate phase
The approved vehicle concept of phase two is developed in line with the project's BTB of phase one. Once approved by the product strategy committees of both ABY and the group, it is released for production. The design freeze stage of this design phase is carefully evaluated to identify the risks involved in lock in and irreversible decisions. Then a cost/benefit analysis is conducted, including the real option value, of building flexibility into the design architecture. An array of software techniques is applied to manage life-cycle production and assembly costs as well as owner operating and maintenance costs.
4. Volume ramp phase
This phase has four stages that prepare for the production and sales of the released design from phase three. The emphasis of the NPD&D management process and of the S&TS section in particular shifts from planning to control of targets for the investment expenditure, unit costs, sales and after-sales service revenues.
5. Market entry phase
In the market entry phase, vehicles are manufactured and distributed to launch markets. Achieving estimated sales volumes and uptake of options are crucial to achieving targets for cash flow, costs, contribution, return on sales and investment. Every aspect of sales, customer relationship management, vehicle and ownership is carefully planned and aligned.
A Case Study on Toyota
Toyota first decides what the new retail price of the automobile is going to be by taking the old price and adding the value of any new functions. The sales division comes up with the suggested production volume, by taking past numbers and indexing them to market trends and the state of competitors. After all these figures have been set, the focus switches to cost planning. This cost plan is based on the product plan and the targets for retail price and production volume. Toyota establishes a profit target that is subtracted to determine their target cost. These cost planning decisions are made three years before they release the model.
When Toyota estimates the approximate costs of a new model it does not simply add up all the costs of the upgraded model, but instead it sums the cost variations of the new model and the old one. Toyota finds this technique to be very beneficial, because it tends to be less work and provides more accurate results. In addition it helps the specific divisions comprehend the cost fluctuations. By using this technique Toyota removes variable costs both models incur, such as wages and indirect costs, and then they can base their decisions only on costs that change between the two models in relation to design and production volume.
"The purpose of cost planning is to determine the amount by which costs can be reduced through better design of the new model." Cost reduction targets are not rationed off to the appropriate divisions by using a standard percentage to spread the reduction evenly over the entire process, but instead the reduction is efficiently passed to each division based on their capability. This capability is determined by the cost manager meeting with each division manager to agree on an appropriate cost reduction for that specific division, and then it is the responsibility of each division to carry out those reductions their own way.
Toyota does this by setting goals for cost reductions through design changes solely, excluding all other factors. Toyota takes these goals and then assesses them to different divisions, to make the necessary changes. Toyota believes that by changing product design and production design to produce lower priced and more efficient products, they will achieve a higher level of profitability.
CONCLUSION
Implementation of management accounting to the NPI-process starts from the early stages when new products are marketed to customers. Preliminary cost accounting gives the first estimates of the cost levels of the future products. The price levels can be determined on customer basis or by for example using target gross margin. Used cost estimates can be based on existing similar products. With brand new products, a feature based method can be used for making the cost estimates.
After the product has been marketed for a customer and an NPI-project is launched the next step is to calculate the component-level cost targets. The cost targets should originate from the sale price and from the gross profit margin target set by the company. Pre-determined product and component-level cost targets are then introduced to the project group so that the targets are understood and furthermore monitored throughout the execution. Evaluating the performance of projects enables a learning cycle and transfers lessons learned to future projects.
Management accounting methods provide tools that support decision-making situations. This enables the development of new products with sufficient cost levels and profit margins. One of the major reasons for implementing cost accounting to the NPI-process is to give engineers the ability to simulate cost implications of alternate product designs. Different production options and various cost activities inside the value chain generate the main challenge for the use of the model.
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