The Use of Managerial Accounting in Toyota - Essay Example

? Managerial Accounting in Toyota Introduction Modern business environment involves high complexity and growing threat ofnew entrants, which together make potential challenges to business firms today regardless of the industry they involve. A company cannot survive the current market competition unless the management gets adequate information constantly. The concept of management accounting or managerial accounting is of great importance in this context because it can assist the top management to make sound decisions on various matters. This accounting branch embraces accounting systems, methods, and techniques that can help the organization maximize its profits or minimize losses. Scholars opine that management accounting is the presentation of accounting information in a way that would assist the top management to create potential policies for managing its daily operations. Management accounting is not confined to financial management information, but it is about comprehensive information about overall organizational activities. It is evident that financial management alone is not capable of providing necessary information for performing managerial functions effectively. In contrast, management accounting is able to provide key information about cost, profits, and factors which are useful for the management to discharge their functions effectively. Management accounting can be considered as an extension of the management aspects of the cost accounting, and it is based on the principles of both cost accounting and financial accounting. It seems that management accounting is relevant to fast growing sectors like automotive industry because those sectors need an uninterrupted flow of various information to ensure improved value chain efficiency. This paper will explore the uses of managerial accounting tools in the automotive industry with particular reference given to management accounting practices in Toyota Motor Corporation. Managerial Accounting The management accounting or managerial account is simply concerned with the provision of accounting information within organizations so as to provide business managers with information that are necessary to make informed business decisions. According to the Institute of Management Accountants (IMA), “management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’ strategy” (“definition of..”). The management accounting information is different from financial accounting information in several aspects. The management accounting information is basically forward-looking whereas financial accounting information is primarily historical. In addition, managerial accounting information is model based and is particularly intended to support decision making. This type of information is generally intended for the use by business managers but not by stockholders, creditors, or the general public. Therefore, managerial accounting information is highly confidential in nature. According to the American Institute of Certified Public Accountants, the practice of management accounting is spread to other three areas such as strategic management, performance management, and risk management. Strategic management is about promoting the management accountant’s role as a strategic partner in the organization whereas performance management deals with improving the performance efficiency of the organization constantly. The risk management is vital to identify and manage risks that constitute a potential obstacle to the achievement of the organization’s long term objectives. A management accountant uses his professional knowledge, experience, and expertise to assist the company management to frame strategic policies and to improve operational efficiency and thereby promote value creation. Therefore, management accountants are generally termed as value creators. An infinite number of tools, techniques, and approaches are used in the field of management accounting. One of the most notable features of management accounting is that it analyzes and interprets various information and data in order to make them understandable and usable for the top management. Management accountants interpret data obtained from the firm’s operational and non-operational activities and make some crucial comments on them. This branch of management is beneficial for the top level executives to judge the effectiveness of their managerial functions. It greatly aids the management to determine whether the organization’s current performance is directed towards the achievement of its long term goals and objectives. The managerial accounting activities are vital to analyze and interpret the historical data and hence to project the future trends of different activities in the enterprise. It plays a significant role in developing a system of feedback reporting and enhancing performance monitoring activities. In the opinion of Debarshi, management accounting has a greater scope and it covers a wide range of accounting systems like financial accounting, cost accounting, forecasting and budgeting, tax accounting and planning, financial analysis and interpretation, internal control and internal audit, management information system, and legal provisions (2-3). Analysis and interpretation of financial statements is one of the major objectives of managerial accounting, and this in turn benefits the process of planning, controlling, and decision making. In addition, management accounting has some other significant objectives like tax planning, communicating, coordinating, and advisory service. Company Background Toyota Motor Corporation (TMC), commonly referred to as Toyota, is a well popular automaker having a strong global presence. The company was founded by Kiichiro Toyoda on 28th August 1937 and it operates under the automotive industry. TMC is headquartered at Toyota in Japan and it employed 333,498 people worldwide as of 2013. Official reports indicate that Toyota is the world’s 13th largest company by revenue as of March 2013 and it was the world’s largest automobile manufacturer by production in 2012. By July 2012, Toyota exceeded the total production volume of 200 million. In addition, Toyota is the Japan’s largest listed company by revenue and market capitalization as of November 2013. It is interesting to note that Toyota has achieved a considerable growth in sales after it was severely hit by the recent global recession. To illustrate, the organization increased its sales volume from 8,418,000 in 2010 to 9,748,000 in 2012 (Toyota). In 2008, Toyota surpassed General Motors in terms of total sales volume and became number one in the world. One year earlier, Toyota together with its partially owned subsidiary Daihatsu had reported the top sales of 2.348 million vehicles. Increased demand for vehicle models like Corolla and Camry sedans have assisted the company to improve its brand sales significantly. The company’s increasing sales in the United States and other countries benefited it to assume the title of the most profitable automobile maker with US$11 billion in 2006. Toyota is the one of a few companies that could report a profitable financial year over the last few years (post recession period). As per reports found in Los Angeles Times, recently, the cost cuts strategy and the weaker Japanese yen benefited Toyota to compensate for a slightly weaker vehicle sales when the company’s quarterly profit increased to 70 percent in the July-September quarter of 2013. According to official reports, the company’s net profit rose to 438.4 billion yen from 257.9 billion yen a year ago ("Toyota profit jumps..”). While analyzing the corporate history of Toyota, it seems that the firm’s management has been successful in addressing various market challenges and promoting its global market expansion. The Toyota has developed its management philosophy from the company origins and it has been very popular in the terms lean manufacturing and Just in Time Production. The company’s managerial values and business strategies are collectively referred to as the ‘Toyota Way’. In 2001, the organization developed the ‘Toyota Way 2001’, a set of core values to which its employees were expected to comply with (Toyota Way 2001). The company maintains an extensive quality assurance system to avoid the sale of defect products and it has made some major product recalls over the last years due to quality issues. In addition, the organization performs better in terms of corporate social responsibility. For instance, the company used its workforce to deliver immediate response to the Great East Japan Earthquake and contributed significantly to rehabilitation activities. Toyota strives to minimize the environmental impacts of its operations so as to fight issues like global warming and climate change. The strong global market presence is helpful for the company to spread risks and to operate with a greater level of market certainty. Respect for People and Continuous Improvement constitute the two fundamental values of the Toyota Motor Corporation. The five principles developed by the organization such as challenge, kaizen (improvement), genchi (go and see), respect, and teamwork constitute its values and conduct guidelines (“Human Resource Development”). Reputed product quality is one of the core competencies of the Toyota. To justify, different Toyota vehicle models have been awarded “the car of the year” many times by independent market surveys. An efficient value chain is another key strength of the organization which in turn benefits the organization to fasten its supply chain operations. On the strength of its improved supply chain performance, Toyota maintains a high output per worker, which can cut down the overall production costs. Description of the use of Tools Referring to Chapman and Hopwood et al., Toyota implemented the management accounting system in 1950 through establishing the concept of ‘cost maintenance’ with intent to restrict the vehicle costs to the scope of periodical financial accounting. The cost concept implementation required identification and the setting of various standards, which were collectively represented as the ‘bench mark cost’ in Toyota’s terms. After a decade, the company divided its cost management process into three phases namely target costing, cost maintenance, and kaizen costing. In addition, the Toyota management developed a distinct approach for each of these three phases (1129). Over the years, the organization notably changed its job culture and gradually developed specific systems for integrating this three-phased cost management practice to form an overall quality control practice. Chapman et al point out that Toyota assigns a Chief Engineer for each vehicle model and this system is a key feature of the company’s product development work (1129). Earlier, the Toyota management believed that systematic inspection procedures could improve quality. With the introduction of advanced management accounting concepts, the company was able to review its cost management procedure from planning to sales. This effort caused to shift the management’s belief to ‘in-advance planning of the manufacturing process determines the quality’ (1129). The Toyota uses a cross functional management system in connection with management accounting. This practice has assisted the company to improve some critical management factors like quality, cost, reliability, delivery dates, and overseas. In addition, this system enabled the company to promote employee accountability and to address sectionalism between departments very effectively (1130). As mentioned already, the management accounting tool can greatly benefit the top management to deal with its daily business tasks more efficiently and effectively. It seems that the Toyota extensively uses the management accounting approach to make its decision making and planning processes effective. In addition, the company uses this management tool for assisting its managers to direct and control operational activities efficiently. Since the Toyota’s business operations are based on some core principles and beliefs, the management accounting practice can have a great influence on its operational efficiency. In Toyota, management accounting is performed by using various accounting data provided by the firm’s internal accounting department. Toyota increasingly depends on management accounting operations to perform cost analysis. Using some key tools of management accounting, the company analyses the total costs incurred to perform a specific task during a particular time period. These tools are also necessary to evaluate the effectiveness of the costs incurred and to identify the areas where costs are high and to be limited. In addition, Toyota follows managerial accounting measures to deal with budgeting because those measures are greatly helpful to estimate the future expenses and revenues. Toyota managers consider budgeting as one of the crucial functions of management accounting. Since management accounting practice assists the organization to identify the areas where costs are high and where resources are excessively utilized, it greatly aids the firm to increase operational efficiency. Similarly, the Toyota management adopts this accounting approach to execute its planning and controlling functions efficiently. For this, management accountants prepare revenue reports and sales backlogs (if any). Such practices would benefit the organization to obtain a clear direction for its future market operations. Managerial accounting helps Toyota to coordinate the operations of its different departments. Based on different managerial accounting tools, it is possible to forecast the future needs of every department and allocate the needed resources thoughtfully. Ratio analysis is a key technique of management accounting and the TMC applies this approach effectively to the financial statements in order to assess the success or failure of its market operations and their future prospects. Working capital management is another key technique used by managerial accountants. This method is used to assess credit controls, work in progress, and supplier payments and thereby to ensure that the organization keeps adequate working capital reserves to meet its daily business needs. In Toyota, management accounting operations also depend on a wide range of other areas like stock evaluation, CVP analysis, capital budgeting, payback, discounted cash flow, internal rate of return, inventory control, and investment centers. It is identified that the management accounting significantly benefits the Toyota’s top management to make crucial investment decisions. As discussed already, this accounting approach is helpful to analyze historical data and effectively anticipate future market trends. Therefore, managerial accounting benefits Toyota to predict future trends in a targeted market segment effectively and thereby determine whether or not a planned investment or a new business project would be profitable. In addition, managerial accounting can be useful to make some crucial interpretations regarding the feasibility of a proposed business investment. Linking core values and core competencies with management accounting As noted already, the TMC pays particular attention to its two fundamental values such as Respect for People and Continuous Improvement in addition to promoting five operational principles including challenge, kaizen, genchi, respect, and teamwork. Similarly, the organization maintains some significant competencies like high quality, an efficient value chain, and a potential R&D. The management accounting concepts are greatly helpful for the company to promote its core values and core competencies. It is obvious that the process of investment appraisal can be strongly supported by management accounting approaches, and this process is vital to measure the effectiveness of the company’s domestic as well as overseas performance. Investment appraisal is essential to form sound decisions regarding future investments and thereby invest thoughtfully in oncoming projects. Although the real benefits of investments are not expected in the short term, it is necessary for the management to assess the project performance periodically. Evidently, management accounting can play a significant role in measuring project performance and thereby enhancing continuous improvement. Management accountants calculate the payback period of multiple projects and assess their individual performance in order to identify individual project performance over a particular period of time. This strategy is beneficial to make necessary decisions at crucial times considering the future prospects of each individual project. For an automobile company, market orientation is of considerable importance because customer tastes and specifications are rapidly changing in the automotive industry. The concept of managerial accounting greatly assists Toyota to successfully deal with market orientation and to facilitate budge allocation and planning for the future ventures. A profit and loss account directly reflects customer satisfaction and assists the company to determine whether to continue the current business strategies. To illustrate, Toyota’s sales in the United States have declined over the last two years and its competitors like Ford are gaining significant advantages over this market due to Toyota’s pedal issues reported in 2008. In order to manage this situation, the organization has to give particular focus to the customer relationship and promotion activities. Evidently such a knowledge would benefit the company to improve its competitive capabilities to a great extent. As managerial accounting is capable of addressing performance management, it can guide and supervise an employee performance evaluation as well. It is clear that different employees have different skills and abilities and hence their individual performance is varied. In other words, different employees contribute differently to the company’s overall productivity and therefore they have to be rewarded accordingly. The top management must ensure that low productive employees do not remain in the organization at the expense of top performing employees. In addition, talented employees must be rewarded adequately so as to make sure that they remain in the company for a long period. A well structured employee measurement program can help the company perform all these things. Hence it can be claimed that management accounting aids the Toyota to enhance respect for people, one of its fundamental values. Similarly, the effective implementation of management accounting is particularly important to improve the competitive position of the organization. It is clear that management accountants can provide the top management with a range of crucial information regarding current market trends, technologies used, and changing customer needs which can have a great influence on the company’s competitiveness. Such a practice is vital to pace with the changing market trends and to vie with the market rivals successfully. Hence, management accounting is a better strategy for Toyota to raise potential challenges to its competitors and to dominate the global automotive industry. Finally, the management accounting concept is really helpful to promote teamwork and to improve overall organizational productivity. Management accountants can advise the top management about potential ways through which teamwork can be encouraged. Evidently, good team spirit can improve employees’ performance efficiency, which is a key factor determining the overall productivity of the company. Summary and Conclusion From the above discussion, it is clear that management accounting greatly assists Toyota to support its core values and to improve its core competencies to a great extent. The major feature of this concept is that it analyzes and interprets various data and makes them usable to the top management. Toyota’s market operations are particularly based on two fundamental values such as Respect for People and Continuous Improvement. Management functions like investment appraisal, market orientation, and budget allocation can be executed efficiently with the help of managerial accounting approach and the effective execution of those functions is vital to promote continuous improvement. In addition, this accounting concept facilitates employee evaluation programs, and assists the organization to improve employee morale. Works Cited Chapman, S. Christopher, Anthony G. Hopwood and Michael D. Shields. Handbooks of Management Accounting Research. Netherland: Elsevier, 2009. Print. Debarshi, Bhattacharyya. Management Accounting. New Delhi: Pearson Education India, 2011. Print. “Human Resource Development”. Toyota. Web 30 Nov 2013. Institute of Management Accountants. Definition of management accounting. US: Institute of Management Accountants, 2008. 1-4. Web. 30 Nov 2013. "Toyota profit jumps 70% despite sales slip." Los Angeles Times. 6 November. 2013. Web. 3 Dec 2013. . Toyota. “TMC Announces Results for December 2012 and CY2012”. Jan 28, 2013. Web 30 Nov 2013. "Toyota Way 2001." Toyotaglobal.com, n.d. Web. 30 Nov 2013. Read More