We would like to discuss the problems being faced by Automobile Industries, During the recession beginning in the early 1990s, the industry struggled with product development, cost efficiency, material purchasing, and problems in adapting to changing market demand and conditions. In 1993, these problems caused the worst sales drop in decades, and the luxury carmaker lost money for the first time in its history. Target costing All-Activity Vehicle concepts were implemented to make the company become viable financially. The company was too big to lose its name. We are talking about Mercedes-Benz one of the Gems of the global automobile industry.

The company developed All-Activity Vehicle was launched in 1997 and it was one of the most radical; projects of Mercedes-Benz. A modular construction process was used to produce the AAV. First-tier suppliers provided systems, rather than individual parts or components, for production of approximately 65,000 vehicles annually. A rough cost estimate was developed that included materials, labor, overhead, and one-time development and project costs. Based upon the estimation the company the company searched for a feasible production country. Monthly departmental meetings were held to discuss actual cost performance compared with standards developed during the cost estimation process. Thus, the accounting system served as a control Mechanism to ensure that actual production costs would conform to standard costs.
Target costing was adopted so that production cost can be well aligned with the selling price and cutting down the abnormal losses of the system. Activity based costing and Target costing both were adopted for making the business strategy of AAV to be successful.

Cost reduction targets were set by comparing the estimated existing cost with the target cost for each function group. These function groups included the following: doors, sidewall and roof, electrical system, bumpers, powertrain, seats, heating system, cockpit, and front end. Next, cost reduction targets were established for each component. Now in order to do a competitive analysis the company adopted competitive benchmark process and tore down competitors’ vehicles to help understand their costs and manufacturing processes. In India we are raising the voice that Cost Audits and data related to that are high risk to the industry where as a company like Mercedes-Benz adopted the same process to understand the business and its changing dynamics.

Costing methods helped the company to create cost benchmarks. This index was created to support the target costing. The company gathered various information from the end user about the various demand and requirements they are looking forward from the car. Based upon these demands and requirements matrixes were created to derive target costing. In that survey it was found that:
After this the company derived the target cost of the various ancillary auto parts of the car based upon the survey and ranked them based upon the index. Target costing was implemented based upon the function group of the products to the end user. To gain a better understanding of the various sources of costs, function groups were identified together with target cost estimates.