Komatsu Ltd. Harvard Case Solution & Analysis


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.


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.


Old costing System           (Fig in ¥)

Total Manufacturing Costs     1,146
 Total Production Overhead        100
 Total Production Costs     1,246
 Production Overhead per Mfg. Cost   0.0873

New Costing System       (Fig in ¥)

Total Manufacturing Cost                1,092
Total Indirect Manufacturing                     54
Total Production Overhead                   100
Total Production Costs                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 1 2 3
 Total Manufacturing Costs 90 102 80
 Production Overhead per Mfg. Cost 0.0873 0.0873 0.0873
 Total Production Overhead 7.85 8.90 6.98
 Total Cost Per Unit 98 111 87


New Costing System       (Fig in ¥)

Product model                       1                       2                       3
Direct Mfg Cost /unit                     87                     98                     75
Control O/H Ratio                0.141                0.141                0.141
Control O/H                     12                     14                     11
Cost Per Unit                99.27             111.82                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....................

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Reviews and updates the structure and characteristics of earth-moving equipment industry is represented in the accompanying case, the company Caterpillar Tractor Co discovered that the cat is suffering major financial losses in the period from 1981 to 1984, the case describes how Komatsu grew from $ 170 million in 1963, local producers year to become a serious problem in the emerging global cat competition. The case traces the strategy should Komatsu to develop its product technology, production and marketing skills throughout the world. Additive, Caterpillar-Komatsu in 1986, provides updates global competitive interaction between Caterpillar and Komatsu. Caterpillar response to the growing market share of Komatsu stated, the impact of rapidly changing dollar / yen exchange provides Caterpillar with an interesting solution pricing. "Hide
by Christopher A. Bartlett, U. Srinivasa Rangan Source: HBS 17 pages. Publication Date: February 6, 1985. Prod. #: 385277-PDF-ENG

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