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AAPRESENTATION PRESENTATION

ON ON TARGET COSTINGTARGET COSTING

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TARGET COSTINGTARGET COSTING

• ORIGIN

The concept of TARGET COSTING had its origin in JAPAN in 1960 as a result of difficult market conditions.

Due to proliferation of consumer and industrial products of western firms in the ASIAN markets.

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Definition Definition

• Target costing is a disciplined process for determining and realizing a total cost at which a proposed product with specified functionality must be produced to generate the desired profitability at its anticipated selling price in the future.

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Target costing is a formal process Target costing is a formal process to achieve the company’s to achieve the company’s

profitability goals by,profitability goals by, Determining a price point (or range of prices)for an

approximation combination of features and benefits.

Subtracting a desired profit from the market price to determine the maximum bearable level of costs.

Iterating the product design-eliminating or reducing unnecessary attributes with costs that can’t be recovered in higher prices-until the cost target is met.

Revising the market price for the redesigned product in view of changed market conditions.

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STAGES IN TARGET STAGES IN TARGET COSTINGCOSTING

Identifying the product that satisfies the needs of the potential customers.

Reaction of the competitors.

Determination of target price.

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Cont..Cont..

Determination of target operating income per unit.

Deriving target cost per unit

Application of value engineering

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Features of Target Features of Target Costing ProcessCosting Process

It is an integral part of the It is an integral part of the design and introduction of new design and introduction of new products.products.

A target selling price is A target selling price is determined using various sales determined using various sales forecasting techniques.forecasting techniques.

Establishment of target Establishment of target production volumes.production volumes.

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Features Features (continued…)(continued…)

Determine cost reduction targets.Determine cost reduction targets.

A fair degree of judgement.A fair degree of judgement.

A series of intense activities.A series of intense activities.

A team-based set up to achieve its A team-based set up to achieve its objectives.objectives.

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OBJECTIVESOBJECTIVESTo lower the costs of new products so To lower the costs of new products so that the required profit level can be that the required profit level can be ensured.ensured.

It emphasizes understanding the market It emphasizes understanding the market and competitionand competition

To motivate all company employees to achieve the target profit

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ADVANTAGESADVANTAGES

• Reduces development cycle of a product.

• Reduces cost of products.

• It enables the organization to face & stay in the ever growing competitive environment.

• It aligns cost of features with consumers’ willingness to pay.

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Cont..

It reinforces the commitment for INNOVATION.

It gives the consumers “MAX. SATISFACTION”.

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Problems Problems

Development of process can be lengthened.

A large amount of cost cutting can result in finger pointing.

Sometimes difficult to reach a conclusion.

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Cost accountants role in a target costing environment:

• The cost accountant (c.a) should be able to provide the design team a series of cost estimates based on initial design sketch, activity based costing reviews of production processes, and ‘best guess” costing information from suppliers based on estimated production volumes.

*c.a should be responsible for any capital budgeting requests generated by design team since he has the knowledge of capital budgeting process.

*c.a should help understand a design team the nature of various costs and cost benefit trade-offs of using different design or cost operation.

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Cont.. *c.a is responsible for bridging the gap between current cost and

target cost which is a design teams goal providing an itemisation where cost saving has already been and where it is yet to be done and where there is no sufficient degree of progress.

c.a must continue to compare a products actual cost after a design is completed and till the company sells the product .

Impact of target costing (t.c) on profitability:*profitability is affected depending on the commitment of management to its use ,constant involvement of a c.a in a product’s life cycle, and type of strategy the orgn. follows .

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Profitability can be improved in two ways:

It places detailed continuing emphasis on product costs throughout the life cycle of every product.

Through precise targeting of correct prices at which company feels it can place a profitable product in the market place that will sell in a robust manner as against the earlier cost plus method.

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Companies using Target Costing

• Companies that use target costing : Although it is a relatively new concept, it is being used heavily in most large companies especially automotive and aerospace industry.

e.g: General Electric Motorola U.S auto companies G.M Ford and Diamler Chrysler.

Japan’s auto companies Toyota Honda ,Nissan , Mitsubishi Nasa U.S Military Sony.

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