Target CostingTarget CostingPresented By….Presented By….

Dharsandiya Broni

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Target CostingTarget Costing

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Topics to be covered :-Topics to be covered :-

Definition of target costingDefinition of target costing

General conceptGeneral concept

Target costing characteristicsTarget costing characteristics

Target costing processTarget costing process

Establishing target costEstablishing target cost

Achieving target costAchieving target cost

Organizational impactOrganizational impact

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What is What is Target CostingTarget Costing

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Target CostingTarget Costing

A target cost is the allowable amount of cost that can be incurred on a product and still earn the required profit from that product

A strategic profit and cost management process Price-led Customer-focused Design-centered Cross-functional Life cycle oriented Value Chain-based

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General ConceptGeneral Concept

Target cost is the cost that can be incurred while still earning the desired profit Selling price – desired profit = target cost

The customer sets the price

Profit must be achieved through cost control

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Target Costing CharacteristicsTarget Costing Characteristics

To these Contradicts the traditional approach: design product, determine cost, set price

Intense customer focus What do they want?

How much will they pay for it?

Can we make a profit on it?

Want answers questions before committing to the project

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Target Costing CharacteristicsTarget Costing Characteristics

Cost control from the beginning 70-90% of costs are committed to at the design stage

Focus on product and process design to engineer out costs from the beginning

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Target Costing CharacteristicsTarget Costing Characteristics

Product, manufacturing process, delivery process designed simultaneously Ensures features customers demand, but within

acceptable cost parameters

Eliminates the temptation to add costly features Customers may not value the added features

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Target Costing CharacteristicsTarget Costing Characteristics Cost control at all phases of the product life cycle

Design

Production

Delivery/setup

Customer’s cost of ownership

Service and repair

Disposal and recycling

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Conceptdevelopment

Planningand market

analysis

Productiondesign and

valueengineering

Productionand

continuousimprovement

Targetprice

Profitmargin

Targetcost

Establishing theTarget Price

Achieving the target cost

The Target Costing ProcessThe Target Costing Process$$

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Target Costing ProcessTarget Costing Process

Two stage process Establish the target cost

Market research

Product planning, concept development stages

Achieve the target cost Value engineering, continuous improvement

Design stage

Continuous improvement in later stages

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Establishing the Target CostEstablishing the Target Cost

Determine the product and its market Who is the target market?

What do they want?

What do competitors offer?

Introduce concept or prototype Evolutionary or revolutionary?

Refine until it meets customer needs

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Establishing the Target CostEstablishing the Target Cost

Determine the selling price Must be acceptable to the customer

Must be able to withstand competition

Existing price +/- value of features added or deleted

Consensus of focus group

Price predicted to achieve a desired market share

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Establishing the Target CostEstablishing the Target Cost

Determine the required profit Return on sales

Desired return

Historical return for similar products

Industry average for similar products

Return on sales will fluctuate over the life of the product

Price and costs fluctuate

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Establishing the Target CostEstablishing the Target Cost

Unit price, cost and profit are almost meaningless because they fluctuate Life cycle totals are more meaningful

Total expected revenue throughout product life- Total desired profit throughout product life = Total target cost

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TARGET COSTING...TARGET COSTING...Achieving Target CostsAchieving Target Costs

InitialCost

Estimates

PerformValue

Engineering

PerformCost

Analysis

DesignProducts

/Processe

s

Release Design

toProducti

on

COMPUTE COST GAP DESIGN COSTS OUT PRODUCE

CompareTo

TargetCost

ACTUAL

COST

EstimateAchieva

bleCost

UndertakeContinuou

sImprovem

ent

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Achieving the Target CostAchieving the Target Cost

Must include the features the customer wants while maintaining cost at or below target

Want to meet the customers needs, but not exceed them

Eliminating desired features will result in an undesirable product

Adding unwanted features will increase cost

Failing to keep cost at or below target will result in unacceptable profits

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Achieving the Target CostAchieving the Target Cost

Determine the cost gap between current cost and allowable cost Current cost is based on

Currently used components

Current suppliers

Current manufacturing processes

Current distribution network

Etc.

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Achieving the Target CostAchieving the Target Cost

Decompose the cost gap Life cycle decomposition

Cost reduction goals are divided among the functions in the product’s life cycle Design/engineering Manufacturing Sales/distribution Service/support General administration Etc.

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Achieving the Target CostAchieving the Target Cost Value chain decomposition

Cost reduction targets are divided among internal and external activities Internal costs

Labor, overhead, selling and administrative costs, etc.

External costs

Components and services acquired from suppliers, etc.

Often represent a large proportion of total cost

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Achieving the Target CostAchieving the Target Cost

Perform value engineering to design out costs without sacrificing needed features Perform a cost analysis of major components and activities

List components or activities and their functions

Calculate a cost breakdown

Determine the current cost of each component or activity and convert to percentage of total cost

Costs include materials, labor, overhead, etc.

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Achieving the Target CostAchieving the Target Cost Generate cost reduction ideas

Seek ways to accomplish the goal at less cost

Consider the process as well as the product More efficient manufacturing processes

Better logistics

Etc.

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Achieving the Target CostAchieving the Target Cost Test the ideas

Will they be effective?

Are they technologically feasible?

Estimate the achievable costs Use activity-based costing, cost tables, etc.

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Organizational ImpactOrganizational Impact

Positives Customer focus

Cross-functional integration

Open sharing of information

Better process understanding

Negatives Too much customer

focus

Potential organizational conflict

Too much pressure to attain targets

Longer development times

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ConclusionConclusion

Selecting target costing process

Using of cost reduction culture

Directing material producer

Sharing staff in company’s achievment

Using of complete information systems

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Thanks for your attentionThanks for your attention

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Any QuestionsAny Questions ?

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