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How do cost allocation practices affect the success of the automotive industry?


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How do cost allocation practices affect the success of the automotive industry?

Luuk Apiwat Resoort (11869259)

BSc Economics and Business Economics, Specialisation Accounting & Control, University of Amsterdam

Bachelor Thesis Supervisor: Anil Kshatriya

29 June 2022 Word count: 6897



Statement of Originality

This document is written by Student Luuk Resoort who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.

UvA Economics and Business is responsible solely for the supervision of the completion of the work and submission, not for the contents.




Due to the Paris Climate Agreement of 2015, it has been decided that the production and sale of cars with an internal combustion engine (ICE) will be banned in the future. The focus of the automotive industry shifts to the sale and production solely of electric vehicles (EVs). Car manufacturers have to reorganize their resources. This also requires a different approach to the cost allocation method. Car manufacturers need to keep up with the competition. And should not underestimate the power of choosing the appropriate cost allocation method. This literature review explains whether the chosen cost allocation method influences the

performance of the car industry.



Table of contents

Abstract………... 3

Introduction………. 5

Literature review………. 8

Principles and methods of cost allocation………... 8

Specific cost allocation in the automobile industry……….. 14

Study on how cost allocation affects the electric vehicle industry…..……… 18

Conclusion……….... 22

References……… 23




Cost allocation has been a very important topic for the automotive industry for decades. Now we are again at a very important turning point in the history of cost allocation for the

automotive industry. This is because of the increasing growth and the increasing importance of electric cars. Total electric vehicle (EV) sales rose to over 10 million between 2010 and 2020 (International Energy Agency, 2021). Therefore, the car industry must start thinking about adjusting the cost allocation. This is to ensure that their car production is and will be future-oriented. The diesel and petrol cars that we know today will disappear soon. The reason for this is based on the Paris Climate Agreement. According to this agreement, 195 countries have agreed to limit the increase in the average global temperature to well below 2 degrees Celsius, and if possible, 1.5 degrees Celsius by 2050. To achieve this agreement, countries must stop selling cars with an internal combustion engine (ICE) by 2050. In an internal combustion engine (ICE), the combustion and ignition of fuel happen in the motor.

During the combustion, the engine partially converts the energy to work. The most used fuels are diesel, petrol, and gas. Different countries have different interests in when and how soon this stop must be introduced.

Countries must determine whether and when they will find it time to stop the sale of ICE cars even before 2050. Not all countries are waiting to implement the transformation to electric vehicles (EV) as soon as possible. Countries that benefit greatly from the current car industry, such as Volkswagen AG in Germany, may postpone this implementation if possible.

This is because the production cost of electric cars (EVs) will be 9% more expensive than the production of internal combustion engine cars, even if the production cost of electric cars decreases by 20% in 10 years (Schnurrer, 2020). The profit margin that a company can achieve on an EV is simply lower than on a car with an international combustion engine (ICE). On the other hand, there are countries, like the Netherlands, that wants to implement this new rule by 2030. Within the period between now and 2050, each country sets its date.

Whereupon they decided to completely switch to the sale of electric vehicles (EVs) and thus ban the sale of internal combustion engine (ICE) cars.

Here it becomes clear that car manufacturers have two choices. The first is, that some car manufacturers will produce and sell internal combustion engine (ICE) cars up to the last moment to get the most revenue with them because the profit margin is higher on cars with an internal combustion engine (ICE) than on electric vehicles (EVs). The second choice is, that



car manufacturers immediately start using all their resources to create and produce the best and the most profitable electric vehicles (EVs). Subsequently, when there is a worldwide ban on the sale of internal combustion engine (ICE) cars, car manufacturers must make sure that their electric vehicles (EVs) are best positioned in the market.

The automotive industry is challenged with how to classify their current and, more importantly, future cost allocation. The automotive industry must change its cost allocation at some point soon. However, it is not yet clear when exactly is the best time to implement this change. The future profit is determined partly by changing the current cost allocation. This is a step-by-step process and will take a couple of years to fully complete. Is it better to make this change as soon as possible, or should car manufacturers wait if possible? Each option has its benefits and disadvantages. But one must use the current knowledge of capabilities, and with rational thinking, the optimal choice. Of course, every company wants to be the market leader after the abolition of the old cars and the implementation of only electric vehicles (EVs). This thesis takes a closer look at how cost allocation practices are used as a tool for companies to achieve this goal. Therefore, the research question is as follows:

How do cost allocation practices affect the success of the automotive industry?

The goal of this thesis is to provide more insight into the transition in the car industry to the production of purely electric vehicles and what the role of cost allocation is in this. This thesis gives two reasons why performing the correct cost allocation method is crucial for car


Regarding the structure of this literature thesis. First, this thesis gives more insight into traditional cost allocation and why this is important. Second, the cost allocation is narrowed to the automotive industry. Third, it gives more insight into how car manufacturers should use cost allocation, to achieve success, concerning electric vehicles (EVs). The thesis will end with a conclusion.



Literature review

This thesis aims to find out whether cost allocation practices determine the success of car manufacturers, to find out whether there is a positive or negative relationship between the success of the car manufacturer and the cost allocation it conducts. The two most important variables are the independent variable and the dependent variable. The dependent variable is the success of the automotive industry, and the independent variable is the different cost allocation methods. In section 2.1 the thesis will discuss in more depth what exactly cost allocation entails.

Principles and methods of cost allocation

To start with, it is important to know exactly what cost allocation entails. And what

consequences different cost allocation practices will have. In addition, the thesis examines the question of why costs are allocated and how this can be done in the fairest possible way.

One must understand what type of costs exist. Every organization incurs costs. These costs can be divided into direct, indirect, and overhead costs. These costs must all be allocated to the relevant department, in the fairest way possible. An organization can be divided into six different departments, with the help of supporting departments. In each department, there is activity generated. With each activity, more value is added to the product or service (Porter, 1985). The current value chain of a company usually consists of six departments. These are the R&D, design of products and processes, production, marketing, distribution, and customer service.

First, there are the costs of the production department. Those costs can be directly allocated to the product or service. Secondly, some costs are indirectly related to the cost object. The cost of the other departments is indirect. To calculate the final cost price, a certain percentage of the cost price must reflect the costs incurred in the departments that are

indirectly attributable to the cost object. Cost allocation refers to allocating the overhead costs to the responsible centres (Choudhury, 1990). Those are costs that can’t be directly identified with the cost object. The object whose costs one wants to know is called the cost object.

Direct costs can be linked directly to this cost object. For manufacture, these are, for example, the raw material costs and the material costs. Indirect costs cannot be directly linked to the



cost object either. Think of the costs incurred at the head office and in the factories. The costs for gas, water and electricity can differ per month and are therefore variable indirect costs, these are costs incurred by the company during the operation. Thirdly, fixed overhead costs are also referred to as indirect costs but are different from those previously mentioned. These are costs that keep the business running. This includes renting a property, research and development costs, permit costs and insurance. These are fixed costs and are independent of the size of the production. These costs are also separate from the turnover because you must continue to pay them even if there is no turnover. To gain more insight into the overhead costs as a company, the percentage of the overhead costs can be calculated as: (indirect costs/direct costs) * 100%. This percentage should be as low as possible to realize a good profit.

To gain more insight into the different cost allocation methods, it is important to understand the purpose of cost allocation. Almost all papers are unanimous on the importance of cost allocation. However, there are also opponents of cost allocation. They believe that this only leads to pointless bureaucracy and possibly to making counterproductive decisions (Lee, 2001). Another reason not to perform cost allocation is that no costs should be charged that the receiver has zero control over. Then each department's profits must contribute to paying the unallocated costs is that it. Nonetheless, most papers see more benefits in using cost allocation, than drawbacks. Cost allocation serves four purposes (Horngren et al, 2009).

First, it is to provide information to managers for management decisions. Managers need to know all cost objects within their department’s amount to implement a good policy. All costs must be known within a department because then managers can choose whether to

manufacture the products themselves, or perhaps it is more profitable to outsource the

product. If the cost price is known, the selling price can also be determined. In addition, when an object is priced, it allows managers to evaluate the cost object.

Secondly, cost allocation serves to motivate managers and other employees. Cost allocation is directly related to managerial behaviour (Kaplan, 1977). If it is clear how much something costs, people can be motivated to reduce the cost of a product. This can be achieved through better product design or lower manufacturing costs. The idea is emphasized by a paper, which describes the results of an empirical study. This research was designed to investigate how top management in companies perceives cost allocation and to evaluate the behaviour of the managers. The empirical evidence shows that top management allocates costs to divisions to influence the behaviour of managers and to take actions that are in the best interest of the



company (Ramadan, 2012). Cost allocation can be a useful tool for controlling and motivating managers (Zimmerman, 1979).

Thirdly, it is to justify the costs incurred to external parties. The cost price is often seen as the fair legal price of the product. A producer normally does not want to sell its products below cost. And with the public disclosure of the cost price, a company indicates that it does not wish to sell its products below that.

And fourth, it is to measure assets and revenues to comply with external regulations and legal reporting obligations. Cost allocation can provide a fair financial picture of the company.

When all costs have been allocated, an income statement can be drawn up. This clearly states how high a company's revenues were in a certain period and whether it had made a profit or loss. All costs incurred are also described herein. Because this information is public to stakeholders, they gain insight into the extent to which business activities are socially responsible and how healthy a company is.

There are several criteria that managers can use to allocate costs. These are justified by four theories (Choudhury, 1990). These are cause and effect, benefits received, ability to bear, and fairness. Cause and effect are used to indicate a relation between things or events. The one is the result of the others. Benefits received are used, when the most profitable

departments also receive the most costs. The ability to bear is used when the most costs are allocated to the largest department because it must be able to bear those costs. Fairness is used when the cost allocation is done as possible, each department is allocated its fair share of the costs.

The two main methods of allocating costs in a company are job order costing, and process order costing. When there is a simple organization or an organizational unit, then job costing or process costing can be used to calculate the cost of products and services made in that unit. The one that is used, depends on the industry in which the organization operates.

The job-costing is used when an organization produces goods and services that are treated as separate products regarding the direct labour costs, direct material costs and indirect

manufacturing costs. A unique cost price is determined for each product or service. With job costing, the costs are different for every job. Every job must be approached differently here, based on the wishes of the customer.

The process costing system is used to determine the cost of a product in mass production. This is used when it is not possible, very expensive or convenient to identify the cost of individual products or services. The unit price can be calculated when the total cost is divided by the



total uni. This is used when the organisation produces the same units, such as in the food or oil industries.

Most organizations consist of several units. These units are also known as divisions or departments. Within this organization, a distinction is made between the operating department and the support departments. In the operating department, there is a direct link between the product or service that is being made and the costs of that product or service. In the support department, there is an indirect link; these are activities that support the operating

departments. To decide how to allocate the operating department and support department to the respective departments, one can use direct allocation, step-down allocation, and reciprocal allocation.

Direct cost allocation can be fixed or variable (Akira, 1981). The costs that fall within the operating department are allocated directly to the cost object. Service department costs are allocated directly to operating departments. To better understand direct costs, they should be divided into variable direct costs and fixed direct costs (Burritt & Luckett, 1982). The fixed direct costs are independent of production, while the variable direct costs depend on


In the step-down method, the service department's costs are allocated in a specific order to the departments it serves. However, when extensive interactions exist between service

departments, neither the direct nor the step-down method is sufficient (Metzger, 1994).

The reciprocal method allocates the costs of the service departments on a simultaneous basis.

It accounts for the inter-service department activities in both directions. The method requires solving a series of equations, as many as the service departments. For the allocation to the operating departments, use the proportion of activities that are considered for the service department. So, with this method, the portion allocated to the operating departments is less than 100%. This is because the cost pools, or service departments, now contain reciprocally allocated costs from other support departments. And these are now larger than the actual cost pools. A small adjustment to the current reciprocal method is needed to provide a clearer picture of the results. This is done using only one iteration of the distribution method, thus the service cost can be better allocated (French & Russell, 2012).

Two newer used costing systems are activity-based costing (ABC) and time-driven activity-based costing (TDABC). Managers use activity-based costing to calculate the cost of a product more accurately. This costing system is used, when there is a significant amount of indirect costs, or the product or service makes various use of the resources. The core of ABC



is to classify activity costs, it states that the activities are the causing the costs. In addition, it must be separated from the accounting system. Ultimately, these costs are allocated to the products by measuring the cost drivers of the costs (Park & Simpson, 2008). ABC links the demands that the activities place on the resources of the organization and the performance of certain activities, it can give managers a clear picture of what resources are needed to produce those products. In the first phase, the significant activities are identified, and the overhead costs are allocated to the activity cost pools. This cost pool contains all indirect costs that are allocated to the cost object and who have something in common. And therefore, are in that specific cost pool. It is important to know what activity has used what number of resources.

The second stage allocates the overheads from each activity cost pool to the product line in quantity to the amount of the cost driver consumed by the product line (Gosselin, 2007). ABC shows the relationship between activities and resource consumption. This gives a better idea of how the costs are divided among the activities that require the cost objects. Traditional cost accounting systems use machine hours and direct labour costs, which are allocated to

products. At ABC, the costs of indirect and supporting resources are separated by activity.

The costs are allocated according to the activities. This allows managers to better respond with actions because costs are allocated based on activities (Cooper & Kaplan, 1991).

Traditional ABC models are unable to comprehend the complexities of the actual operations.

In addition, it is difficult to implement on a significant scale because of the expensive, and complex to adapt and maintain. Finding cost drivers, calculating the cost, and defining activities take a lot of time. Time-driven activity-based costing offers a solution here (Kaplan

& Anderson, 2003). This allows managers to continuously report all their costs. This is done in such a way that it shows both the time spent on it and the costs of the activities that a company makes. Also, another appropriate costing method is target costing. With target costing, the focus is on what a product may cost. Information about the sales market and the competition is explicitly looked at. This allows for making a desired product for the customer.

It focuses on cost management from the start, so the design and planning. Minimal costs are added during design, consequently, this can keep the cost price low. What is favourable for the selling price.

Regardless of the cost allocation method used, the procedure is the same. The process consists of (1) defining a cost object, (2) accumulating attributable costs into a cost pool, (3)

determining the cost allocation basis, and (4) actual allocation to the cost objects (Homburg, 2001; Rossing & Rohde, 2010). Cost allocation may not change the profit of a company.

However, this is the case if the cost allocation is not carried out correctly. Then some



departments may be over or underestimated in the books. Wrong cost allocations can have a bad influence on managers' ultimate decisions. And it influences the price that the consumer must pay. Moreover, there is a relationship between the chosen cost allocation method and the managerial decisions that follow (Brüggen, Krishnan, Sedatole, 2011). A different cost

allocation method, therefore, leads to different decisions made by the management. One should consider the importance of correct executing the cost allocation. Otherwise, this will likely negatively influence the success of a company. There is, however, an important caveat when the costs of the common resources increase. Then a company should discourage the use of this common resource. The company must ensure that any efficiency allocation is a

reflection of its underlying costs (Ray & Goldmanis, 2012). There is evidence that performing cost allocation has a better impact on a firm's performance (Cohen & Loeb, 1988). When there is no allocation, the resources, and efforts are unrestricted among the divisions.

Divisions would then be able to exchange unlimited products against the effort. However, the effort gives disutility and should be used as little as possible. So, if costs are allocated to divisions for the use of products, the use of effort decreases. And increases the performance of a company.



Specific cost allocation in the automobile industry

To get a better idea of the cost of producing a car, it is important to understand the business model of the car manufacturers first. The definition of a business model has been adjusted over the years. The term is used worldwide for all types of businesses. The concept is open to multiple interpretations, which sometimes contradict each other. On the one hand, Da Silva &

Trkman (2014) believe that the term ‘business model’ should not be confused with terms such as a ‘strategic plan’ or ‘process model’. However, on the other hand, Casadesus-Masanell and Ricart (2010) do believe that the business model reflects the strategy that is being pursued. To understand the essence of the business model, it is not important which interpretation is adopted. The fundamental feature is that it is the core logic of how a company creates value (Kallio et al., 2006). A business model is different for each company and may vary for every department.

This thesis focuses on today's largest automakers and Tesla, Inc. There is a difference between a parent and subsidiary company, and a standalone company like Tesla, Inc. Tesla, Inc, designs, manufactures, develops, and sells electric cars. The company is active in the automotive and power generation segments. On the other hand, there are companies such as Toyota Motor Corporation, General Motors Company, Stellantis N.V., and Volkswagen AG.

The latter operates as a subsidiary of Porsche Automobil Holding SE. These companies offer vehicles under many well-known brands. These brands range from the low-end market to the high-end market, with brands such as Chevrolet, Cadillac, Chrysler, Citroen, Fiat, Jeep, Lexus, Toyota, Audi, Volkswagen, and Bentley.

A business model has four most important characteristics, process, value proposition, profit formula and resources (Porter, 1996). The process involves working together to tackle recurring tasks consistently through training, development, budgeting, and planning. The value proposition is about a product or service that helps customers more effectively and affordably perform a task they are trying to do. The profit formula deals with costs and revenues, and how much must be produced for a company to break even. Resources are people, technologies, products, facilities, equipment, and brands needed to deliver this value proposition to specific customers. All four different components of the business model differ slightly from each other, per the company mentioned above. Of course, every company has its own set of business model characteristics. For Tesla, Inc, which is known as the best and most advanced provider of electric vehicles, is the most distinct value proposition. Moreover, they have their own supercharger network and super-fast charging, and it charges high miles per



charge. Toyota Motor Corporation is known for its lean production and has its own Toyota Production System. This is a management system that organizes logistics and production for the car manufacturer. This also includes all interactions with customers and suppliers. For General Motors Company, an important value proposition is that it wants to market its vehicles as cheaply as possible at all costs, which is why it pursues a cost leadership strategy.

All companies have a comparable cost and revenue structure. Most of their revenue comes from the sale of vehicles, parts, and associated services.

For the costs incurred, reference can be made to the value chain of the companies.

There it can be seen which departments incur which costs. It is necessary to zoom in on the process part of the business model. In this way, more insight can be obtained into how the costs are distributed among the car manufacturers. In addition to the factory, a car

manufacturer consists of even more departments. The cost of all departments must be assigned to the cost object, in this case, the car. The total cost of a car consists of material costs, factory value-added and general overheads (Roy et al. 2011). All departments of the company are included, and the costs of each department can be allocated to the cost object using different cost methods. As for the production of materials or parts, activity-based costing gives a fairer representation of the real cost of auto parts, compared to traditional cost accounting (Kumar & Mahto, 2013). So, it can be calculated which parts or items should be produced more to achieve its goals.

The materials section can again be divided into four sections. The first is about general information about the raw materials. The other explains the commodity rates. The third is material overheads. These are costs associated with administration costs due to the purchased raw materials. And lastly, the material used is covered. Regarding the material costs, it can be concluded that these can be directly allocated to the cost object.

The factory value added consists of direct and indirect labour costs, machine costs and tooling costs. The direct costs are here also immediately allocated to the cost object. A different cost allocation method can be chosen for indirect labour costs. There are also the machine costs.

These costs consist of machine floor space, machine specifications, number of parts per cycle, and total part lifetime volume. These costs are again subdivided into machine cycle time, machine rate and processing scrap. But also, the costs of building the machine, depreciation, rent, insurance, maintenance, and miscellaneous costs are included.

The third factor is the general overhead. These are indirect costs such as design, R&D, logistics costs, profit margin, sales, marketing, and general administration costs. The car manufacturer is dealing with both indirect and direct costs here, and these must all be



allocated to the cost object, the car. Different cost methods must be applied for this. Since the indirect costs cannot be allocated using the direct cost method, and vice versa of course.

There are several cost methods within the entire car industry. And because several

departments are involved in the production of a car, there is usually not one cost method used.

But several cost methods are used to determine the cost price. Multiple costing, also called composite costing, is used here. This is because when calculating the cost of a car, a

combination of multiple calculation methods is used. This is mainly used in an industry where separate components are manufactured. And when assembling all these separate components a final product is made. This is the case in the automotive industry.

Which cost accounting is applied depends not only on the industry in which the company operates. Geographical factors also play a role here, where the company is located.

In America, for example, traditional absorption costs are used to allocate overhead costs to products. The newer approach, activity-based costing, is not widely applied due to its

implications. In Germany, a newer version of activity-based costing is used, namely resource consumption accounting (RCA). This produces better results and provides more detailed management accounting information than the traditional method (Clinton, 2004). The standard cost in the US consists of direct labour, direct material costs and allocated

manufacturing overheads (Buys, 2007). In the US, overheads are allocated to production to recoup all costs. However, this is where the biggest difference lies with Germany. In

Germany, the main goal is not to allocate all overhead costs to production, but these costs are linked to marginal costing and are much the same as activity-based costing (Gunther, 2005).

And Toyota uses a process costing system, which is used in all departments of its company.

Today's automotive industry is about to transform. Not only because no production and sale of cars with an internal combustion engine may take place before 2030 and at the latest before 2050. But the function that the car provides in our society is also changing.

Previously, the car was only seen as a product, but this is changing to a more service-oriented function. Shift from ownership to use with private lease and car-sharing concepts (KPMG, 2022). The first cause of this is Covid, which means that the expected advance of the electric car with the associated innovation has strongly decreased. Due to the pandemic, many people had to work from home and didn’t use their cars. The car was used less and less, with the result that the demand for newer cars decreased. This also does not benefit the acceleration of innovation of new electric cars. This also emerges if you look at the sales figures, figure x, in



which you see that in the years 2020 and 2021 the sales figures of vehicles have decreased.

The second cause is the global chip shortage. This is also a result of the pandemic. This forced many people to work from home, which increased the demand for smartphones, laptops, and tablets. At the same time, people needed the car much less often, so demand fell sharply afterwards. Covid also forced many factories to close where those chips were made.

All in all, partly due to the pandemic and the chip shortage, the car has acquired a different function within society. Consumers' focus is shifting more from ownership to use. Mobility is seen more as a service, because of which leasing companies see their turnover grow, while dealer companies see their turnover decrease. The automotive industry is in the middle of a technological revolution, it needs to improve and change its way of thinking and its business models. It also must reach new target groups. Companies need to start thinking like a start-up and reach the digital consumer. They must shape and implement this change at an

unprecedented speed. Only in this way can a car manufacturer lead the way in a world where new commercial opportunities are there for the taking (EY, 2022).



Study on how cost allocation affects the electric vehicle industry

Car manufacturers have to grow in the future. Companies must adopt new decision-making frameworks. To justify their new strategies, the business model is adapted to make it future- oriented. New dominant positions will take place and old orders will fall. Companies should not only focus on battery electric vehicles (BEVs) but have a look at the possibilities. Options such as hydrogen fuel cell EVs (FCEVs), and hybrid and plug-in electric cars are being explored. Both newcomers and the established order should keep all possibilities open. And the question is when they will make their investments. When is the right time to fully focus on electric cars? And how can they respond to this regarding cost allocation? More companies want to keep a first-mover benefit strategy, while other companies want to follow the leaders.

It is a fact that the diesel, petrol, and gas cars that we know today are disappearing. So, as soon as the sale starts being banned, a company has to make sure it is well-positioned in the market right away; that's the goal. The modified business models must show they can execute or want to be a follower.

Cost allocation will play an important role here, for two reasons. The first is about identifying and allocating costs to the cost objects. For the production of an electric car, new factories have to be built and production processes have to be rearranged. This process must be done properly. Buying an electric vehicle has several disadvantages for the consumer, where cost allocation may offer a solution. These obstacles must first be resolved, to get a fair picture of all the costs of the individual departments and the cost price. Once this has been mapped out, a fair cost analysis can be applied to it. Before the electric car can take the place of the cars with a combustion engine, several things still have to be improved. After these improvements have been implemented, the fair cost of producing an electric car can be calculated. This is because then all costs have been considered. These are costs ranging from renewing, adapting production, and R&D to better batteries, but also expanding charging networks. When all the new extra costs are known, which have been incurred because the car industry transitioned to electric cars, only then can the real fair cost price of an electric car can be calculated. Using indirect cost multipliers to estimate the total cost of adding new

technology to the automobile industry (Rogozhin et al., 2010). If it is not possible to calculate all indirect costs related to new technologies, an indirect cost multiplier can be used. Indirect costs vary with the period and complexity of the technology. The case of the electric car



revolution is relatively complex and covers a long period. That is there is relatively a high indirect-cost multiplier. Considering all costs, a cost price can ultimately be determined. The cost price of the electric car is directly related to the success of a company. The first point a car company has to deal with is the social pressure to limit the cost of an electric car. Many people find the purchase of an electric car too expensive. And that is why we also see the shift from owning a car to using a car as a service. To start with, the range of an electric car must increase. Currently, the average range of an electric car is between 250 km and 450 km. Many consumers prefer to see at least a doubling of this before making a purchase decision.

Furthermore, the charging infrastructure must be improved, with many more charging stations in Europe and in areas where it is not as densely populated as in the city. Incidentally,

charging should also be smarter and easier. Tesla is responding well to this by setting up its own supercharger network. With this station, you can recharge for 275 kilometres of range within 15 minutes. People do not want to wait 4 to 5 hours at a station before the battery is charged and the road can be continued. And most importantly, the purchase price of an electric car must be reduced. Many consumers indicate that they are willing to buy an electric car. But they still consider the price to be a threshold (x). On the one hand, there is something to say for this, because the price of a car with an internal combustion engine (ICE) is

considerably cheaper than an electric car. On the other hand, it may be a fact that there will be no more cheap cars in the future. This will depend very much on whether the cost price of the batteries that must be in the electric car can be reduced, due to economies of scale. If this is not the case, then the customer may have to get used to the higher costs of the electric entry- level models. And if there are no longer any ICE cars available, consumers will have no choice if they want to buy a car. An incorrect sales price can be determined by incorrectly applying a cost allocation method. This hurts the profitability of the company. It also works the other way around, according to a study of the car industry in India. Implementing a correct cost allocation method has a positive effect on the profitability of a company. The study states that traditional costing methods are no longer able to provide accurate cost information. This, therefore, gives a wrong picture of the actual costs incurred. That is why other cost methods were looked at and, in the study, they arrived at a target costing. The research is related to the implementation of target costing in the Indian automotive industry on profitability. In

conclusion, this implies that target costing has a positive impact on the profitability of the automotive industry in India (Narsaiah, 2020).



Second, cost allocation is used indirectly to calculate the profitability of each department. Depending on this, budgets or additional financing are determined. If the main goals are to calculate capacity planning, then the cost allocation method must be adjusted.

This means that not the car is used as a cost object, but as a resource (Balachandra,

Balakrishnan, Sivaramakrishnan, 1997). With the disappearance of combustion engine cars, budgets, financing, and investments have to be classified differently per department. Cost allocation must ensure that the goals, targets, and budgets that top management gives to each department are a fair reflection of reality because based on these budgets and targets, the profitability of a company is determined. These budgets are based on the cost allocation method. If this is not the proper allocation method, then all the company's intended targets are based on nothing. Cost allocation is also used for financial reporting purposes. In this way, the costs are spread over each department. The profitability per department is calculated and specific financing or budgets are drawn up based on this. If automakers want to have enough car production by 2050 to comply with the Paris climate agreement, then they must spend at least 23% of all capital expenditure on low-carbon R&D (IEA, 2021). Low-carbon R&D focuses on technologies that are greener solutions for the environment. However, more investment in R&D does not necessarily mean more success. Because higher R&D investments are directly related to higher risk-taking firms (John Mariadoss, Johnson &

Martin, 2012).

To improve new technologies, such as hybrid, electric and fuel cell vehicles, major investments are needed to be able to develop these technologies. In doing so, car

manufacturers are certainly not reserved with their investments. Volkswagen AG wants to invest US$ 83 billion before 2025 in hybridization, electric mobility, and digitalization.

General Motors will invest US$ 35 billion in self-driving cars between 2020 and 2025.

Between 2021 and 2025, Stellantis will invest US$ 34 billion in electrification and software.

Companies have to consider that it will take years before new factories or departments run at full capacity. For example, a new factory where lithium-ion automotive batteries go into production. It will take at least five years to get that off the ground and to be able to run at 100% capacity. On June 21, 2022, Toyota Motor Corporation expanded its business and opened a brand-new plant in North America. This factory represents a US$ 12.9 billion investment. This is also Toyota's first factory where it will produce its own lithium-ion batteries. With this investment, Toyota Motor Corporation ensures that it is ready for the future. Moreover, they ensure that they are not dependent on external problems, such as supply problems. With this investment, Toyota Motor Corporation makes a statement that it



will focus more and more on electric vehicles. However, this is in contrast with the statement of Toyota President Akio Toyoda. He is convinced that the end of cars with an internal combustion engine will lead to the collapse of the Japanese car industry (Toyoda, 2020). But with this investment, he admits that his Toyota also accepts this new development. And that the future is all about electric cars. One company that has already stepped ahead in the transition to the production of electric vehicles is Tesla because it has been making electric vehicles from the very beginning. In addition, the vertical integration within Tesla, Inc, makes the company very valuable. But that huge investments don’t always work out well is also the case for Tesla. Due to external causes, financing, and investments in two new factories do not lead to the desired results. The cost of a new Tesla factory in Austin, United States cost US$

1.1 billion and the cost of the new Giga factory in Berlin, Germany cost US$ 4 billion. These opened in April and March of 2022, respectively, but are running at a loss of billions of dollars, partly due to problems in the supply of parts from China. As a result, the output lags far behind the budgeted output. Accurately predicting in which departments and where exactly to invest is therefore vital, to stay ahead of the competition. This is also in the interest of a company’s success. Because an inappropriate cost allocation gives a wrong picture of the profitability of the departments. As a result, the planned targets and investments are made based on wrong assumptions. This leads to the wrong use of resources, which is at the expense of the company’s performance.




Many cost allocation methods are possible, to implement in the automotive industry. As this thesis shows, the automotive industry uses multiple costing. Different processes require different costing methods. Due to the transition from cars with an internal combustion engine to electric cars, the business models in the car industry need to be adjusted. Resources must be used in a different way, and cost allocation must be done differently than before. Cost

allocation can influence the success of the automotive industry. The importance of the

appropriate cost allocation method should not be underestimated. A correct allocation method ensures the correct cost price of an electric car. However, before the cost price can be

calculated, all hidden costs should be included in the calculation. These hidden costs are a result of the development of electric vehicles. These costs exist for example because of;

research on lithium-ion batteries, building new future-orientated factories or expanding the charging infrastructure. All these costs must be allocated to the correct cost object, in the right way using the correct allocation method. Finally, all these costs must be included in the calculation of the cost price of an electric vehicle. In this way, the profit margin can be maximized, which contributes to the success of the company.

When a wrong cost method is applied to a process, this is expensive and creates a disutility. Furthermore, cost allocation is used to calculate the profitability per department.

Targets, budgets, and investments are made based on these methods. When an inappropriate allocation method is applied, the calculated targets and budgets are based on false

information. The investments that follow are therefore ineffective and fail to achieve their goal. This leads to poor performance of the company, due to the poor use of resources. Thus, applying different cost methods, that are inappropriate to use, hurts the success of car





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