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TARGET COSTING
Managerial Accounting
TARGET COSTING
Meaning Application Value Engineering Kaizen Costing Traditional Costing Process Model Target Costing Process Model Merits & Demerits Target Costing Case Study Target Costing
MEANING
Target Costing is a process of developing costs for a product (or services) based on market driven considerations.
A method that allows firms to provide consumers with products that they want, at a price they can afford, and still earn desired financial returns.
Six Key PrinciplesPrice Led CostingCustomer FocusFocus on design of products and processesLife Cycle cost reductionValue Chain involvement
APPLICATION
To start from the market and work back to production process, through design and development of product that customer needs at acceptable prices.
It is applied in the design and development stage. Target Cost of a product = Target selling price less Target Profit Value Engineering is a key to achieving target costs.
It is a systematic evaluation of all aspects of production and marketing that starts from R&D, Design of products, and distribution to customers, ending with customer service.
Target costing is widely used by Japanese and American Industries in automobiles (Toyota), Electronics (Panasonic), Information Technology (Apple).
VALUE ENGINEERING
VALUE ENGINEERING
Value Engineering (VE) is a management technique that seeks the best functional balance between cost , reliability and performance of a product, project and process or service.
Value engineering (VE) is a systematic method to improve the "value" of goods or products and services by using an examination of function. Value, as defined, is the ratio of function to cost. Value can therefore be increased by either improving the function or reducing the cost
For example, the function of a pencil is to "make marks". This then facilitates considering what else can make marks. From a spray can, lipstick, a diamond on glass to a stick in the sand, one can then clearly decide upon which alternative solution is most appropriate.
VALUE ENGINEERING - MERITSDecreasing cost
Increasing profits
Improving quality
Saving time
Using resources
more effectively
High return on
investment
Reduced capital costs
KAIZEN COSTING
CHANGE FOR BETTER
KAI
ZEN
Change
Better
TARGET COSTING / KAIZEN COSTING
Kaizen costing is a cost-reduction system that is applied to a product in production.
The word ‘Kaizen’ translates to ‘continuous improvement’ or ‘change for the better’ and aims to improve productivity by making gradual changes to the entire manufacturing process.
Kaizen costing is applied to products that are already in production phase. Prior to kaizen costing, when the products are under development phase, Target Costing is applied.
TRADITIONAL COSTING PROCESS MODEL
Product Requirement
Product Design and Development
Supplier Cost Estimates
Production
Process Design & Product Cost Estimates
Cost is too high
TARGET COSTING PROCESS MODEL
Market Research
Product Strategy and profit plan
Product Design and Development
Production and Logistics
Competitive Strategy and Intelligence
Value Engineering
Voice of Customer Establish and Attain Target cost
Sales
TARGET COSTING – 4 STEP APPROACH
Design & Develop
product that customer
desire.
Determine Target price based on customer perceived value &
competitive market
Determine Target Cost
by deducting
Target profit margin
Perform Value
Engineering to achieve
Target Costs.
CASE STUDY - TATA NANO
PRODUCT DEVELOPMENT - NANO
To develop a product for people who want to move from 2 wheeler to 4 wheeler in affordable price.
Car to cost within a price range of Rs 1,00,000. Car to be developed with low cost, safety, low on emissions
and fuel efficient. To be a truly people’s car. Car to be developed on three main factors.
CostSafetyRegulatory requirement
PRODUCT DEVELOPMENT (TARGET COSTING)
Just one wind shield wiper
Plastic panel designed to
eliminate need of screws
Seats with integrated head
rest
Use of aluminum engines to reduce weight and cost.
No radio, No AC, No side mirrors
Material Substitution (i.e.
Engineering Plastics)
Use of Plastic and adhesive rather
than Welding and metal body.
REFERENCES
Cost Accounting – Theory & Practice
www.tatanano.com, www.tatamotors.com
www.google.com , www.wikipedia.com
THANK YOU
Institute for Technology and Management
(ITM)
Mahesh KaraneSneha
ChougulePraveen
Devasthali
MBA’ 11
