1

INTRODUCTION

Komatsu Ltd. was founded in 1917. Komatsu is a largest industrial manufacturer of Japan and it
is a large international firm with revenue of 989 billion and with the net profit 31 billion, it
organized three major lines of businesses including Construction equipment, industrial
machinery and applied electronic material. With these business lines they are producing 80% of
corporate revenue and remaining 20% revenue accounted for other operations such as real state
software development, constructions and plastic. Apart from this, Komatsu adopted 3G strategy
for growth, group diversification and Globalization, the main objective of this strategy is to
achieve Wide-reaching production for the year 2010. Komatsu Ltd. main goal is to facilitate and
provide a strong long term strategic relationship to their partner countries.
2

PROBLEM/ANALYSIS

The key Problem that is being faced by Komatsu Ltd. in developing new cost system was
budgeting to evaluate the right amount of share of its total budget for the right unit of production
unit. Komatsu Ltd. was going to change their old costing system to new costing system. The new
costing system is the simplified form of old costing system. Management decided to combine
indirect manufacturing overhead cost and production overhead cost into a single category called
plant control overhead.
The new costing systems divided into seven major overhead categories that include General and
Administration, planning and coordination, purchasing warehousing, manufacturing engineering,
manufacturing controlling, inspection and technical Center overheads. Old costing system
consists of three major categories which are Direct manufacturing overhead Costs, indirect
Manufacturing Costs, and Production Overhead Costs. The major problems that are being faced
by Komatsu Ltd towards the costing systems are to determine the production Control Overhead
Ratio in New Cost System and the allocation of Production Control Overhead Costs to Product
Models in new Cost System.
Allocate the units of manufacturing overheads and production overheads by identifying per unit
cost to each and every category that is added to new costing system and also supervise the total
production cost to all those units that produce in old costing system.
The production efficiency helps in making the decision towards old Costing System efficiency.
The new costing system creates the ratio contribution towards plant control overhead which
improves the overall system of the production. It also helps in resolving the key issues that
previously were suffered by Komatsu ltd in old costing system.

SOLUTIONS ALTERNATIVES

Old costing System

(Fig in )

Total Manufacturing Costs

Total Production Overhead
Total Production Costs

1,146
100
1,246

Production Overhead per Mfg. Cost

New Costing System

0.0873

(Fig in )

Total Manufacturing Cost

Total Indirect Manufacturing
Total Production Overhead
Total Production Costs

1,092
54
100
1,246

Plant Control Overhead

Production Overhead per Mfg. Cost

0.1410

Above figures show that the total manufacturing costs 1146 in old costing system is greater than
the new costing system 1092 because the new cost strategy is divided into sub categories to
improve the plant control operations and it will work effectively for Komatsu Ltd to achieve their
goals regarding manufacturing concerns but it also increases the cost of the Production Overhead
per Mfg. Cost in the new costing system. Komatsu is already facing the lease demand from
Indonesia and China due to this change and some other factors that can reduce their
manufacturing cost that is also suggested in the new costing.
Old costing System

(Fig in )

Product model

Total Manufacturing Costs

Production Overhead per Mfg. Cost
Total Production Overhead
Total Cost Per Unit

90
0.0873
7.85
98

102
0.0873
8.90
111

80
0.0873
6.98
87

New Costing System

Product model
Direct Mfg Cost /unit
Control O/H Ratio
Control O/H
Cost Per Unit

(Fig in )
1
87
0.141
12
99.27

2
98
0.141
14
111.82

3
75
0.141
11
85.58

This segment examines three different product models with respect to their cost per unit
production. Other cost per unit for all the products slightly increase from the old costing system.
The third product model that effectively decreases with 1.5 per unit cost in new costing system
will help to bear the other two product model per unit cost that slightly increases as compared to
old costing system.