Melco Management Accounting Research
Discussion Paper Series
No.MDP2016-002
How does a company prevent sticky costs?
Strategic capacity cost management: A case study of Komatsu

April 2016
Kohji Yoshikawa*
Kumamoto Gakuen University
2-5-1 Oe, Chuo-ku, Kumamoto
862-8680, JAPANe-mali:kohji.yoshikawa@kumagaku.ac.jp
Hirofumi Asada
Osaka University of Economics
e-mali:h.asada@osaka-ue.ac.jp
Yasuyuki Kazusa
Professor Emeritus, Kyoto University
e-mali:kazusa@melco-foundation.jp*Corresponding author

The Melco Foundation
Nagoya, Japan
Discussion Paper Series of the Melco Management Accounting Research, in order to promote
the study of management accounting, has published this unfinished paper onto the Web. Pleaseobtain the permission of the author when citing this paper.

How does a company prevent sticky costs? Strategic capacity costmanagement: A case study of Komatsu＜Abstract＞
This study highlights the case of strategic capacity management in the sticky cost
literature, according to which the absolute change in costs associated with decreased
sales activity is systematically less than that associated with increased sales activity(Anderson, Banker and Janakiraman, 2003). By analyzing the case of Komatsu, wedemonstrate that a direct costing system contributes to business performance
improvement. In particular, top management can prioritize the use of resources
depending on strategy, and the company can maintain the current capacity cost level
by offsetting costs for growth and the effects of structural reforms, known as“decoupling costs from growth.” The way to achieve cost improvement is based on
total quality management (TQM) practice, and direct costing works when it isrelated to TQM activities. We conclude that direct costing with improvement
knowledge, such as TQM, can prevent sticky cost issues.
＜Keywords＞
Sticky cost, Strategic capacity cost management, Total quality management, Cost
improvement
Kohji Yoshikawa*, Kumamoto Gakuen University
Hirofumi Asada, Osaka University of Economics
Yasuyuki Kazusa, Professor Emeritus, Kyoto University*Corresponding author
Email: kohji.yoshikawa@kumagaku.ac.jp
2-5-1, Ooe, Chuoku, Kumamoto, 862-8680

11 Introduction
The purpose of this study is to examine how to manage sticky cost issues by using acase study of Komatsu, which is one of the largest manufacturers of major
construction and mining equipment. Traditional cost management literatureclassifies costs into variable costs and fixed costs. Variable costs change depending on
activities and fixed costs do not vary with activities in a certain period. However,many researchers have argued that this characterization of cost behavior isinconsistent with the way that managers actually manage costs (Cooper and Kaplan,
1998). Johnson and Kaplan (1987) pointed out the limitation of traditional costaccounting, which loses relevance in the management accounting system through“relevance lost.” They criticized total cost accounting because the inaccurate
allocation of overheads which are not related directly to labor hours, misleads andresults in incorrect decision making. Johnson and Kaplan (1987) also criticized direct
costing that focuses on short-term variable costs and pays little attention to
long-term cost variation.
Anderson, Banker, and Janakiraman (2003) provided the first large-sample
evidence in which cost changes depend not only on capacity usage, but also on the
direction of the change in activity. They find that on average, selling, general, andadministrative (SG&A) costs fall less in response to a given decline in sales revenue
in the previous year than they increase in response to an equivalent increase inrevenue. This is called “sticky cost.”
The reason why cost stickiness occurs is asymmetric adjustment that favors
upward versus downward activity change. Traditional management accounting
literature ignores adjustment costs, such as search, recruitment, and training, inincreasing labor input and severance payments in decreasing labor input. Whenadjustment costs are present, managers weigh the costs of releasing (adding)resources when activity decreases (increases) against the alternative of not adjusting.
Anderson, Banker, and Janakiraman (2003) assumed that much lower downward
revisions are systematically more costly than upward revisions.
Activity based costing (ABC), activity based management (ABM) are assumed tohelp organizations to make cost improvements (Kaplan & Cooper, 1998; Noreen,1991). However, cost behaviors differ from their assumptions in which costs change2depending on cost drivers companies use (Noreen and Sodrrsorm, 1994; Anderson etal., 2003).
On the contrary to the situations in the U.S and European countries, the rate ofusage of ABC and BSC is absolutely low in Japan (Yoshida et al., 2012), andcompetitive power in Japanese manufacturing companies has not yet dropped off(e.g., Fujimoto, 2013). The reason Japanese companies do not introduce ABC is
explained as follows. Overhead costs that are fixed costs in European countries andthe US are regarded as direct costs (Sakurai, 1995; Kobayashi, 1992), and setting
the cost pools for cost allocation might be more costly. Nonetheless, ABM might beuseful for cost improvement in Japan (Sakurai, 1995). This suggests that traditional
costing is still problematic.
How have Japanese enterprises implemented cost improvement without ABC/
ABM? Furthermore, how has management accounting played a role in cost
improvement? In Toyota’s production system, target costing, cost improvement, andcost maintenance are well known, and the development of strategic frequent new
products (Kazusa, 2014), strategic planning (Kato, 1993) with target costing, andkaizen budgeting (Tanaka, 1990; Monden, 1988; Maruta, 2005) are pointed out as
the roles of accounting.
Meanwhile, Taiichi Ohno who modeled Toyota production system expressed
skepticism as full costing was not useful for cost improvement in Toyota (Ohno,
1978), and non-financial indicators, such as shortening of lead time and reduction ofstock by Just In Time, are essential at the factory floor level. This suggests a
relationship between management accounting and kaizen activities. Without ABC
and ABM, how have Japanese companies solved the issue of overhead costmanagement? In addition, how have they prevented sticky costs if they haveproblems? Using the case of Komatsu, this study shows that the introduction of
direct costing leads to management reforms and strategic management of capacity
cost (CC) on condition that the organization is capable of improvement based on total
quality management (TQM).
The rest of this paper proceeds as follows. In Section 2, we review arguments
about traditional fixed cost management and discuss the research question. In
Section 3, we provide the research method. Our fieldwork is shown in Section 4. In
addition, we describe Komatsu’s standard variable margin (SVM) management and3CC management. Then, the findings are discussed in Section 5 and Section 6
concludes.

2 Cost stickiness and capacity cost management
2.1 Cost stickiness and cost behavior
Anderson, Banker, and Janakiraman (2003) provide the first large-sample evidence
that changes in cost depend not only on the usage of capacity, but also on the
direction of the change in activity. They find that on average, SG&A costs fall less in
response to given decline in sales revenue in the previous year than they increase in
response to equivalent increase in revenue. It is called “Cost sticky”. Since then,several scholars have tried to understand cost behavior (Anderson et al., 2007;
Calleja et al., 2006; Balakrishnan and Gruca, 2008).
In addition to research about understanding cost behavior, factors to influence
cost stickiness have been recently discussed (Banker et al., 2013, Balakrishnan and
Gruca, 2008; Balakrishnan et al., 2004; Balakrishnan et al., 2014; Holzhacker et al.,2015). Banker et al. (2013) hypothesize that cost rigidity increases when demand
uncertainty is high and companies choose more fixed cost than variable costs in highdemand uncertainty. However, it is generally assumed that less fixed costs andhigher variable costs are suitable when demand uncertainty is high. Banker et al.
(2013) admit this supposition but suggest congestion cost increases more when
demand uncertainty is high. Meanwhile, Holzhacker et al. (2015) show demand
uncertainty and financial risk make companies choose more variable cost using
outsourcing, leasing and contracting non-regular employees by hospital data. As aresult, cost elasticity increase and the cost structure become more flexible.
It is not clear that what kind of factors have influences on decision about cost
structures. Most data of this area are collected by quantitative research, and morequalitative research to understand cost management activities is required (Andersonand Lanen 2007; Kajiwara 2014). Anderson and Lanen (2007) concluded there is aneed for more investigation through fieldwork about cost management in terms of
cost stickiness. Hereafter, we summarize how fixed cost management is understood
next.

4

2.2 Capacity cost management and research question
Traditional cost accounting theory assumes that costs consist of variable costs
and fixed costs relating to usage of capacity. CCs, which are very similar to fixed
costs conceptually, are traditionally classified as committed costs and managed costs(NAA, 1963). In addition, managed costs consist of policy costs and operating costs,
summarized in Table 1. In this way, capacity costs are managed based onorganizational layers and managerial periods.
Table1: Traditional fixed cost management

Committed cost
1

DecisionManaged cost

DecidedNot decided

making2

Controllability

Uncontrollable

inshort Manageable

period3

Variability

Stable for several years

Variable in 1 year

4

Accounts(Fixed assets)

Policy cost

Operating

Depreciation, Fixed asset

cost

tax, Insurance, Rent

R&D

Energy(Human resources)

MarketingManager’s

Fixed salarySocial expensesalaryManagement salary
5Management

Middle-range plan

Allocatedway→ Proper decision making

based

→
6

Quality cost

Usage

budget Variable
on budget

management management

after introduction

policyManagement

Top management

Middle management

layer

Middlebasedonactivities

management

depending on delegation
However, Borden (1990) stated that costs should be managed by short-term
variable costs and long-term variable costs, as he criticized traditional costclassification as being unsuitable for managing indirect costs using ABC. Long-term
variable costs do not change quickly while they change depending on the volume ofactivities. These kinds of fixed costs, such as set-up costs, order costs, and5schedule-planning costs, have increased recently (Borden, 1990). Such costs do notchange depending on usage of capacity (Cooper and Kaplan, 1998). For example, iforganizations want to reduce set-up costs, they need to reduce support staff or cut
hours for setting up. Long-term variable costs are classified as fixed costs
traditionally (NAA, 1963).
Organizations have at least two options for management of increasing CCs,
including sticky costs: aiming for correct allocation of products, such as ABC/ABM, orgiving up overhead cost allocation. In either case, organizations have to reduce idle
CCs and utilize them more.
In this study, we aim to discuss how companies can cope with problematic CCs,
which is one of the most important issues in such a competitive environment. Ourbasic research question is how companies can solve sticky cost problems without
using ABC/ABM. We take Komatsu’s cost management practice and show a
successful case of managing overhead cost issues.

3 Research method
3.1 Research site
The case study company is Komatsu Ltd., which is the second-largest company inthe global construction and mining equipment industry. Komatsu manufactures andsells construction and mining equipment, utilities, forest machines, and industrial
equipment. Komatsu was established in 1921. Currently, it has 47,208 employees in
180 group companies around the world as of March 31, 2015. The company’s
consolidated sales were 1,978,676 million yen as of March 31, 2015.
Komatsu is well known for its innovative business models. For instance, theKomatsu Machine Tracking System (KOMTRAX) has terminals installed on
construction equipment to transmit information concerning the location, cumulative
hours of operation, and operating condition of vehicles using global positioning
system (GPS). Another example is Komatsu’s autonomous haulage system, which isa remote-controlled system to run super-large driverless dump trucks.
Komatsu is an appropriate case study for our research not only because it is oflarge enough scale to operate a mature management control system but also because
it has experienced changes in sales in both upward and downward directions since62001.
3.2 Overview of investigation
To explore the detailed process of cost management, we use the method of a
retrospective case study. Before starting our interview research, we investigated theliterature concerning management practices at Komatsu. We found dozens of studies
concerning TQM practices at Komatsu, and we referred to some books and articles
written by past chief executive officers (CEOs). This literature supports the datafrom our interviews.
In January 2014, we started to visit the case company to perform interviews (seeAppendix). Our investigation was conducted by a disinterested observer. In order toavoid respondent bias, we conducted interviews with the chief financial officer, senior
managers, managers, and staff in the accounting, information, research anddevelopment (R&D), and manufacturing departments. We visited various places,
including the head office and some plants, to collect data.
We conducted semi-structured interviews in which we proposed a list of question
items in advance of the interviews. Most of the interviews were recorded using avoice recorder and note taking. For the purpose of protecting confidential
information and avoiding factual errors, we presented the information to thecompany before making this study public.

4 Management accounting control system at Komatsu: Standard variablemargin management and capacity cost management
In this section, we show the management accounting system at Komatsu, that is,
SVM management and CC management. First, we explain the middle-termplanning and budgeting process. Then, the structure and function of SVM
management and CC management are shown. Finally, we explain TQM as a systemof supporting cost improvement and budgeting control.
4.1 Middle-term management planning and budgeting process
The company develops a basic middle-term management plan for 3 years, and a
new plan is developed every 3 years. The management target is to maintain high7

profitability in the construction equipment businesses and to control the net
debt–equity ratio under 0.3 to improve the financial standing. Although sales targets
are estimated, the accounting numbers are flexible because the demand forconstruction equipment depends on the world economy.
The sales plan in the annual plan is based on forecasts made by eachdepartment, taking into account recent economic changes and world economic
growth rates. These forecasts are discussed in the management meeting andapproved. In addition, annual monthly plans are revised twice a month, while
production plans are revised frequently to maintain optimal inventory volumes.
KOMTRAX is indispensable for forecasting the demand for construction
equipment at sales and production meetings. Each piece of equipment has a
KOMTRAX, including GPS, which enables the company to know how much theequipment works in real time. Initially, KOMTRAX was introduced to detect theft,
but now, it is also used to forecast future demand and helps the company support
maintenance services.
4.2 Calculation structure of MACS: Standard variable margin management
When Masahiro Sakane became CEO of Komatsu in 2001, the company had
made huge losses of about 800 million yen, resulting in a management emergency.
Before 2000, the problem was that capacity costs had increased as sales increased,
meaning that capacity costs were not fixed. Under full costing, capacity costs areallocated to products, and people used to believe they could cover CCs as long as
sales grew. However, this was not true. Therefore, Sakane changed the full-costaccounting system into a direct-cost accounting system as one of his managerialreform policies.
SVM management is based on direct costing, in which costs are divided into
variable costs and fixed costs, and the range of responsibility is set very clearly. The
operational income is calculated as follows (Table 2).

8

Table 2: Operational margin by standard variable margin management
Sales

100
Purchasing goods
Variable cost
Internal process cost45
44Standard variable cost (SVC)

49

Direct sales cost

5Standard variable margin (SVM)

46

Other variable cost (OVC)

2

Maintenance cost ・ Production

9

Capacity cost (CC)
Other administrative cost20

Capacity cost

29

Operational margin

15

Source: Compiled by authors based on information from the company

Standard variable cost (SVC) is based on purchasing goods and the internal
process cost. Variable costs include SVC and direct sales cost, which consists ofpackaging, freight, and so on. SVM refers to sales minus variable cost. Cost varianceand claim cost are counted as other variable cost (OVC). OVC consists of OVC I, thatis, warranty cost, including claim cost; OVC II, which is wage variance, efficiency
variance, budget variance, material price variance, cost improvement, and so on; andOVC III, which is closing adjustment, like lowest cost accounting.
The SVC of Komatsu is unchanged annually, and the company focuses on OVC,
including the improved cost and reduction of CC to achieve its financial targets. Thisis seen as the mission in factories.
The departments involved in sales, production, purchasing, and R&D, as well as
the head office, have responsibility for such factors as SVM, OVC, and CC, as shownin Table 3. The factories used to be seen as a profit center, but they are now regarded
as a cost center. The sales department has the responsibility to achieve SVM byincreasing sales volumes and sales prices, while the production and purchasedepartments are responsible for SVC and OVC. The R&D department has indirect9responsibility for SVM and SVC because it changes designs of models. For example,
it adds new functions to raise prices, or helps the production department to reduce
costs by reducing parts or sharing parts. Finally, all departments, including the head
office, have responsibility for CC.
Table 3: Responsibility accounting
Department

SVM

SVC

Direct Sales

OVC

CC

Cost
Sales

○

○

Production○

Purchase

○

R&D

（○）

○

○
○

○

○

○
○

（○）

Head office○

Source: Compiled by authors based on information from the company

10

4.3 Fixed cost management: Capacity cost management
4.3.1 Structure of capacity cost management

Table 4 shows the responsibility for CC and the main themes for achieving
targets.
Table 4: Capacity cost management
Department
Factory

Labor cost

Topic
No. of people,

management cost

overtime
hours

Pro

Depreciation

duc

Other expense

Volumemaintenance

tion
ove
rhe
CC

Each
Equipment costadDepreciatio

Normalcompany,

Capacityndepreciation

department

utilization

Incremental(counted bydepreciationaccounting)

Other expense
SG

cost

R&D cost

Repair cost
Research&A

expenseSales and product supporting cost

Promotion cost

Head office cost, Administrative cost

Officeother

cost
Source: Compiled by authors based on information from the company

Factory management costs consist of indirect labor cost, factory depreciation,
volume maintenance cost, and other costs. Volume maintenance cost refers to thedevelopment cost for improving present products and production systems.
Equipment costs consist of depreciation and other expenses. The initial budget is set
by the accounting department, which is based on the plan for recruiting staff andinvesting in equipment. CC is managed on a monthly basis.

11

The aim of the introduction of SVM management is to clarify the costs for which
each department is responsible. Distributing the responsibilities for CC and setting
targets for each department enables the company to clarify the key points ofmanagement and assists the organization to achieve its targets. The accounting staff
member in a factory had the following to say after the introduction of SVM
management in 2002.
“For me, the clarification of the center of responsibility was essential. The factory used to be a
profit center that was the key factor in performance measurement, and therefore, the manager
had to focus on the operational profit of the factory. After SVM management, the sales department
has responsibility for SVM, and the factory can focus on the costs for which it should be responsible”(Accounting staff member).

4.3.2 Decoupling costs from growth

The company tries to keep the rule of “decoupling costs from growth,” whichmeans that it does not increase fixed costs, even if sales grow. However, it has apolicy not to decrease R&D expenses, which are met by cutting other costs in the
production and administration departments. As a result, as shown as Figure 1,
Komatsu succeeded in keeping its fixed costs level in times of sales growth, and in
reducing fixed costs in time of sales decline. This suggests that Komatsu prevented
the occurrence of sticky costs, given that all SG&A expenditure is considered as fixed
costs.

12

Figure 1: Sales and capacity cost
Source: Provided by the company
4.3.3 Strategic choice of capacity costs

The company’s R&D policy is to develop “Dantotsu products” in terms ofenvironment, safety, ICT, and economy. This has involved the decision to sacrificesome functions in order to focus on two or three innovative and superior functions
that other competitors take several years to follow, and to set aside more than 10% of
product costs as investment to develop the next Dantotsu products. These products
have superior functions and quality, which has given the company a top slot in global
market share. One of Dantotsu products is KOMTRAX, which has set the standard
for all equipment. This policy was initiated by the CEO, Sakane, during thecompany’s management emergency (Sakane, 2009). It reduced half kinds of its R&D
products, and focused the R&D resources on high SVM products.
“It was also an important point, and I cut down the fixed costs of non-production departments,
as well as added necessary R&D expenditure for our growth strategy. ‘Dantotsu’ seemed to sound
nice, R&D staff worked harder” (Sakane, 2009: 43).

In fact, SG&A expenses were more problematic in terms of CC. The rate of
SG&A per unit of sales was approximately 6% higher than Komatsu’s competitor
because the company owned about 300 subsidiaries and had additional
administrative staff. To deal with its financial crisis, it needed to reduce fixed costsby selling non-core businesses, such as electronics, eliminating and consolidating
subsidiaries, and offering one-off voluntary retirement. To improve SVM, thecompany cut down the number of items that were of low profit. Less than 2 years
after 2001, the company was able to cut 500 billion yen from fixed costs. Finally, its
operational income ratio in 2007 was almost the same as its top competitor.

13

Figure 2: Conceptual direction of growth
Source: Provided by the company
Komatsu’s basic management concept is summarized in Figure 2. While it attempts
to maintain current CCs, it charges costs for growth. In particular, in the case of thefinancial crisis, the CEO chose a strategic priority of R&D expenditure to introduce
Dantotsu products.
4.4 Total quality management as an action management tool
The significant factors in budgeting are TQM, which is supported in the visionand credo of the “Komatsu way” as well as in Komatsu’s budgeting practice.
In Komatsu, TQM is understood as a tool for controlling cost by budget, and it isa concrete action management tool for checking the progress of cost improvement.
Policy deployment is developed from vision to a strategic plan, top management
policy, departmental management policy, middle manager policy, and annual action
plan (for middle managers, sectional chiefs, and staff). In addition, an action plan isdeveloped in each section.
Komatsu started TQC activities in 1962 as an improvement initiative by all staff,
14

known as “Maru A Provision.” By this initiative, the company was awarded theDeming Prize, and its activities were established in the organization. Currently, thecompany sets a middle-range plan, management policy, and departmental actionplans, which are done according to a plan–do–check–act (PDCA) cycle (Arai, 2012).
Policy deployment is a tool for communicating top management policy to all
employees and is utilized in dealing with environmental changes and improvementby considering issues deeply. For successful policy deployment, it is necessary for acompany to maintain a business culture by which the organization can change its
business plan when the environment changes, and middle managers understand top
management policy, exercise autonomous PDCA management, and develop the
middle up by applying the top management policy.
The Komatsu way, completed in 2006, works to maintain the organizational
culture. For example, significant factors for departmental managers and managers
in subsidiaries, as per the chapter on management, is that they activate board
meetings, do not postpone risk issues, comply with business rules, and always
consider successor training. The top management needs to explain the company’ssituation and future direction to all employees every 6 months.
Based on the organizational culture, TQM activities, such as meetings ofbusiness planning, enterprise project management, autonomous improvement
activities to strengthen the factory floor, and small group improvement activities, areimplemented in the organization. In terms of the relationship between the
improvement activities and accounting numbers, the accountants have calculated
the cost improvement amounts and examined how they affect the financial
statements. When factories held responsibility for profit, they had to take care ofboth sales and production. However, after introducing SVM management, they needfocus only on OVC, which means there is clarification of managed objects. They feelthat they can more easily understand the TQM improvements in terms ofaccounting numbers.
Even though the factories focus on OVC, the production cost, they do not stop
considering sales. Instead, their relationship with the sales department has been
deepened. Based on the TQM process, each department aims to move in the same
direction and deal with environmental change through regular meetings among
sales departments, production departments, and factories in Japan, called “sales–
15

production meetings.” This is held at the head office every month, and the managers
check the sales plans and production plans. In addition, participants revise the plans.
KOMTRAX is utilized for gathering information through the whole supply chain,including sales agents. As a result, the production departments not only have cost
responsibilities, but also consider sales through these meetings.
TQM activities are developed by departments indirectly related to production,and the reduction of CCs occurs not only for production cost, but also for SG&A costs.
“I believe that the successful managerial reform was based on the improvement initiative
developed by TQM. Komatsu introduced QC activities in the 1960s. Based on the field principle,
we see the facts in the field and use data to understand status. From this understanding, wedevelop strategy for issues and check the results again; we develop the PDCA cycle. This
improvement knowledge was accumulated not only in production departments, but also in indirect
departments as field DNA” (Sakane, 2009: 12).

In Komatsu’s case, relating SVM management and CC management to TQM
knowledge supports the company’s improvement activities and achievement of its
strategic policy, “decoupling costs from growth.”

5 Strategic capacity cost management
This study examines how Komatsu got over the sticky costs problem. The
problem in Komatsu was that fixed costs increased when sales increased, whichmeant capacity costs were not fixed. In addition, factories held responsibility forprofit, which made their management range too wide.
In order to solve these issues, the company introduced SVM management andCC management by dividing costs into variable and fixed costs, giving eachdepartment responsibility based on the controllability principle. The improvement
costs are calculated as OVC, and the company plans favorable variances and revises
the plans with great flexibility by updating the forecasts. The indirect costs in ABC
are dealt with as variable costs in Komatsu. Under CC management, the fixed costs
are managed so that the total cost does not increase when sales grow. When sales
decrease, the level of fixed costs is reduced. In particular, the top management did
16not decrease R&D expenses to achieve its strategy, while the reduction ofadministration expenses contributed to the great improvement in earnings.
This study gives an account of how a direct costing system can solve overhead
allocation issues and sticky cost problems, which is not ABC in the case of Komatsu.
The question then arises: what conditions are suitable for direct costing?
In Komatsu, SG &A was allocated to products, in which the company used total
full costing: beyond full costing. The problems therein were that responsibilities
become unclear under allocation costs and expenses. Under SVM management andCC management, each responsibility has been clarified. In ABC, the organization
develops cost improvement based on activities in which it has a standard while
discussing the reason for allocation and waste of resources. By using ABC, theorganization focuses on its activities to solve issues in allocating costs, such as
unclear responsibilities. It attempts to find the key factors and manage activities. In
a sense, corporate staff play an important role in cost improvement. In Komatsu,
cost targets are not set based on departments, but people on the factory floors play
the main roles in cost improvement initiative, in which the knowledge for cost
reduction is based on TQM. Corporate staff give departments the resources for cost
improvement and encourage their autonomous activities. This has the advantage of
not allocating the costs.
Komatsu’s case shows that direct costing contributes to cost improvement by
providing cost information to support existing capabilities for improvement, such as
TQM.
The extant literature discusses that the variable cost ratio decreases while thefixed cost ratio increases under the contemporary business environment, and as aresult, the relevance of direct cost decreases (Dilts and Russel, 1985; Sakurai, 1992;
Johnson and Kaplan, 1987). In Komatsu, internal processing costs are managed as
variable costs, and the ratio is somewhat significant. Under direct costing, anotherissue is that direct cost information makes it difficult to recover full costs by setting
price. Komatsu avoids this issue by setting price to make marginal profits to cover
the total fixed costs. Some scholars indicate that direct cost accounting suits matureand declining markets, and is not suitable for the high-tech industry because thenature of the decline phase is relatively short. The construction machine market isstill developing, although it is a high-tech industry in a sense, and yet, direct costing17

contributed to solving Komatsu’s organizational crisis. In addition, the fixed cost
ratio at Komatsu was relatively higher than at its competitor, and the company wasable to solve this issue by guaranteeing R&D spending and reducing total fixed costby strategic CC management. This does not conform to issues addressed in theliterature.

6 Conclusion
This study examines whether ABC/ABM using exhaustive cost allocation is the
only solution under competitive circumstances with increasing capacity costs. Ourcase study shows that direct costing after quitting full costing contributes to an
improvement in business performance. Without ABC/ABM, direct costing is related
to cost improvement activities with TQM. We call Komatsu’s cost management
practices strategic capacity cost management. Its characteristics are strategic
priority principles for capacity resource allocation, decoupling costs from growth, andcost improvement knowledge, such as TQM. We contribute to the extent literatureby adding ideas about how to manage capacity costs from a strategic viewpoint.
In this study, we show the results of offsetting increasing costs for growth anddecreasing improvement costs, but we do not show what Komatsu has done inreality and how it has achieved this. We need more research about Komatsu’s case.
In addition, future research is needed to investigate whether cost management in
Komatsu is applicable to other industries or companies in similar industries, andhow other enterprises deal with the issues of traditional cost accounting.

18

Appendix

1

2

3

Date

LocationInterviewee

Duration

1/22/2014

Head Office

Executive Officer, Information Strategy Division;

1.5 hours(Tokyo)General Manager, Controlling Department, etc.

Head Office

Executive Officer, Information Strategy Division;(Tokyo)General Manager, Controlling Department

Head Office

Chief Financial Officer;(Tokyo)Director;

5/26/2014

7/7/2014

1 hour3 hours

Senior Executive Officer;
Executive Officer, Information Strategy Division;
General Manager, Controlling Department
4

8/27/2014

Oyama Plant

General Manager, Administration Department;

4 hours

Senior Manager, Accounting Section, Administration(incl. 1 hour observation)

Department;
Manager, Accounting Section, Administration Department;
Manager, Accounting Section, Administration Department;
Manager, Quality Control Department
5

8/28/2014

ResearchGroup

Leader,Division

Department;

Accounting

Section,Administration

2 hours

Staff, Administration Department
6

10/27/2014

Osaka Plant

General Manager, Administration Department;
DeputyGeneralManager,

Accounting

4 hours
Section,(incl. 1 hour observation)

Administration Department;
Senior Manager, Manufacturing Department;
Manager, Manufacturing Department;
Manager, Administration Department;
Manager, Quality Control Department
7

12/17/2014

Osaka Plant

General Manager, Administration Department;
DeputyGeneralManager,

Accounting

2.5 hours
section,Administration Department; Manager, Administration19

Department
8

2/23/2015

ThailandVice President, Accounting Manager

Plant

4 hours(incl. 40 minutes
observation)

910

9/17/2015

11/9/2015

Head Office

General Manager, Controlling Department

2 hours(Tokyo)Staff, Controlling Department

Head Office

Accounting Manager, Accounting Manager

2 hours

Executive Officer, Information Strategy Division

2 hours

Head Office

Executive Adviser (former CEO)1 hour(Tokyo)Executive Officer, Information Strategy Division(Tokyo)11

12/3/2015

Head Office(Tokyo)12

12/24/2015

20

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