Target Costing

43Target Costing for Flexible Manufacturing Systems—A FAST Approach

Target Costing

for Flexible Manufacturing Systems

—A FAST Approach

© 2005 The ICFAI University Press. All Rights Reserved.

N Raviswaran* and R Gandhinathan**

1. Introduction

The new economic policies and revolutionary liberalization has made competition to

reach heights that were never seen before. Globalization has opened up fantastic

opportunities for the Indian industries. Nevertheless, the Indian manufacturers are

witnessing a bewildering scene where the products with best quality and least cost

alone can survive. With this scenario, a paradigm shift is required in the approach of

manufacturers towards cost management.

With markets opened to all and having lean and flexible manufacturers worldwide,

cutting cost and becoming cheaper is vital to become market leader. A case of an

Indian auto component (Air-horn) manufacturer has been taken up in this work. A

target cost was set, based on market conditions and the same has been achieved through

a structured Value Engineering approach.

* Senior Lecturer, Department of Mechatronics Engineering, Kongu Engineering College,

Perundurai, Erode, Tamil Nadu, India. E-mail: [email protected]; [email protected]

** Assistant Professor, Department of Mechanical Engineering, PSG College of Technology,

Coimbatore, Tamil Nadu, India.

New Product Development (NPD) process has undergone revolutionary

changes during the past few years due to global economic policies. The

organizations have made their manufacturing systems flexible and agile to

adapt to changing customer needs. However, with ever increasing demand

on lower prices, the NPD process is under constant pressure today to deliver

products at lowest possible cost. Target Costing (TC) has emerged as one

primary tool backed by conventional NPD tools like Value Engineering (VE),

Quality Function Deployment (QFD) and Design For Manufacture (DFM) to

facilitate the manufacturer in this emerging economic scenario. The primary

objective of this work is to study the influence of Value Engineering on Target

Costing process. The case of an Indian Auto manufacturer has been taken

up and a Target Costing process aided by Value Engineering has been applied.

The approach and results have been discussed in this paper.

The ICFAI Journal of Operations Management, May 200544

2. Target Costing and Value Engineering

Cooper and Slagmulder [12] define Target Costing as “a structured approach to

determine the life cycle cost at which a proposed product with specified functionality

and quality must be produced to generate the desired level of profitability over its life

cycle when sold at its anticipated selling price”. A Target Costing model proposed by

Cooper and Slagmulder is given in Figure 1.

Figure 1: Target Costing ModelP

rod

uct–

lev

el

Targ

et

Co

sti

ng

Targetsellingprice

Targetprofit

margin

Allowablecost

Marketconditions

Market-drivenCosting

Strategiccost

reductionchallenge

Productlevel

target cost

Target costreductionobjective

Currentcost

Functionlevel

target cost

Componentlevel

target cost

Suppliers

Component-levelTarget Costing

2.1 Need for Value Engineering

Value Engineering emerged from the industrial community during World War-II. Since

its development by Lawrence D Miles, a staff Engineer of General Electric in 1947,

Value Engineering has evolved through years and in today’s market has proven itself

to be one of the soundest economic ventures. L D Miles defines Value Engineering as

“a philosophy implemented by the use of specific set of techniques, a body of knowledge

and a group of learned skills. It is an organized creative approach, which has for its

purpose the efficient identification of unnecessary costs, i.e., costs which provide neither

quality, nor use, nor appearance and nor customer feature” [3].

2.2 Value Engineering Enabled Target Costing

Target Costing enables the manufacturer to identify the product level as well as

component level target cost requirements. To create intensive pressure on the product


designers to reduce costs, product level target costing focuses designer creativity on

reducing the costs to their target levels [2]. These targets are set so that they can be

achieved only if the product designers expend considerable efforts to design for cost.

Value Engineering is the primary technique used to find ways to decrease product

costs, while maintaining the functionality quality and the customer demands. As such

Value Engineering is an integral part of target costing.

3. Setting Up the Target Price

M/s Jaishree Industries (name disguised) make air-horn for trucks and buses and

they were faced with stiff competition in the market by three leading horn manufacturers.

The manufacturer decided to develop and launch a single frequency air-horn, which

is already picking momentum in the market.

The selling prices of different competitors were collected from various dealers and

are listed in Table I. (The prices and costs indicated in this paper are in “Indian

Rupees” and denoted as cost units in all places, for the benefit of readers in other

countries).

S. No Competitors Selling Price to Dealers (in Cost Units)

1 A 63.00

2 B 60.00

3 C 61.50

Table I: Selling Price of Competitors

Minimum available price to market = 60.00 cost units (from table I)

For Jaishree Industries to enter, a 12% reduction on existing market price was

decided by marketing team.

Therefore, selling price for M/s Jaishree Industries = 60.00 – 7.20 = 52.80

= 53.00 cost units (Approximately)

3.1 Arriving at the Target Cost

The methodology involved in arriving at the target cost is given in Table II.

Parameters Cost in

Cost Units

Target selling price to dealer (A) 53.00

Less excise duty @ 16% on manufacturer’s invoice price (B) 7.50

Invoice price of manufacturer (C) = (A) – (B) 45.50

Profit @ 12% on selling price for manufacturer

(company’s policy decision) (D) 5.50

Target Cost (C) – (D) 40.00

Table II: Arriving at the Target Cost


The challenge ahead of the company now is to make a single frequency air-horn at

a cost of 40.00 cost units meeting all customer needs.

4. Value Engineering for Achieving Target Cost

A structured Value Engineering approach as detailed below was followed to achieve

the set Target Cost.

(a) Collection of existing cost details

(b) Pareto analysis to short list items to be taken up for Value Engineering

(c) FAST diagram for Air-horn

(d) Function-cost worth analysis

(e) Evaluation of short listed ideas

(f) Summery of savings and presentation

4.1 Product Cost Based on Company’s Existing Design and Technology

The Bill of Material details of various components in the product are shown in Table III.

S. No. Components Qty Operational Material Material Processing Compo-

Target (if any) Cost in Cost in nent’s

Cost Units Cost Units Total Cost

in Cost

Units

(A) (B) (A)+(B)

1 Main body 1 Black colored Al. with 7.50 Machining 11.00

outside painting -1.50 and

Paint-2.00

2 Back cover 1 Black colored Al. with 3.25 Machining- 5.75

outside painting 1.25 and

Paint-1.25

3 Trumpet 1 Dia. of 80mm Polypro- 8.00 Moulding – 12.50

and 350mm long pylene 4.00

with tensile strength

of 12N/mm2

4 Spring 1 5 turns, 1mm dia Phosper 1.25 Coiling and 2.00

and tensile strength bronze heat treat-

of 1900N/mm2 wire ment – 0.75

5 Diaphragm 1 0.25mm thickness Phosper 2.00 0.25 2.25

and tensile strength bronze

of 30N/mm2 sheet

6 Seal 1 24 hrs-water Hi – nitrile 4.00 - 4.00

immersed test rubber

7 Fasteners 6 50 hrs – salt Mils steel, 2.40 - 2.40

spray test Zn. green (6 x .40)

passivation

Table III: Existing Cost Data


Product cost from Table III = 39.90 cost units

Assembly and inspection charges = 5.50 cost units

Supervision cost @ 0.50 cost units per horn = 0.50 cost units

Packing and finished product storing cost = 0.30 cost units

Selling expenses @ 1.20 cost units per horn = 1.20 cost units

Transportation and freight insurance = 1.00 cost units

(@ 1.00 cost units per horn)

Total cost of the product = 48.40 cost units

Target cost to be achieved = 40.00 cost units

Drifting cost = 8.40 cost units

4.2 Pareto Analysis to Shortlist Items

A Pareto Chart was constructed based on existing cost details of an Air-horn product

and is given in Figure 2.

Based on the pareto chart,

the items were short listed

for further work.

Product cost = 39.90 cost

units. According to Pareto’s

80-20 principle, 80 % of the

product cost = 39.90 x 80/

100 = 31.92 cost units.

The short listed items

which contribute to 80% of

the total cost of the Horn are

Trumpet, Main body, Back

cover and Seal.

4.3 FAST Diagram for Air-horn

FAST is an advanced technique developed by Charles Bytheway to determine the

relationship between functions in the analysis of an entire system, process or a

complicated assembly, and gives a better understanding or the interrelation of

functions and their costs [7]. This technique basically finds answers to three questions

about each function performed by the product or service, Why? How? and When?

The FAST diagram constructed for the Air-horn taken up for this study is shown in

Figure 3.

Tru

mp

et

Main

b

od

y

Back

cover

Se

al

Fast

en

er

Dia

ph

rag

m

Sp

rin

g

Figure 2: Pareto Chart for Air-horn

Pareto Chart

Co

st i

n C

ost

Un

its


Fig

ure

3:

FA

ST

Dia

gra

m f

or

Air

-ho

rn

Sa

feR

idin

g

H

ow

?

So

un

d L

evel:

120±

5 d

BA

Fre

q:

400±

20

Hz

Leak

P

roo

f

Fa

cil

ita

teM

ou

nti

ng

Su

pp

ly A

ir

Pro

vid

eA

est

he

tics

Pre

ven

tL

ea

ka

ge

VE

S

cop

e

Wh

y?

Pro

vid

eP

art

s

Warn

ap

pro

ach

Tra

nsm

itso

un

d

Vib

rate

air

co

lum

n

Am

pli

fyso

un

d

Cre

ate

reso

nan

ce

Vib

rate

dia

ph

rag

mP

rovid

ete

nsi

on

Sti

ffen

dia

ph

rag

m

Ho

ldp

art

s

En

clo

sep

art

s

Ad

dw

eig

ht

Ind

uce

vib

rati

on

Str

en

gth

en

tru

mp

et

Wit

hst

an

dvib

rati

on

Un

wan

ted

fun

cti

on

Un

wan

ted

fun

cti

on

All

ti

me

fun

cti

on

s


4.4 Function—Cost Worth Analysis

A brainstorming was conducted involving personnel from various departments and

several alternate proposals are analyzed. The final proposals short listed were tested

for their functional worthiness and most of the proposals were found to be acceptable.

The details of analysis are tabulated in Table IV.

Table IV: Function—Cost Worth Analysis

1 Trumpet

2 Main

body

3 Back

cover

4 Seal

(i) Create

resonance(B)

(ii) Withstand

vibration(S)

(iii) Provide

aesthetics(S)

(i) Hold and

Enclose parts(B)

(iii) Facilitate

mounting(B)

(iv) Prevent

leakage(B)

(v) Supply

air(B)

(vi) Provide

aesthetics(S)

(i) Hold and

Enclose parts(B)

(iii) Prevent

leakage(B)

(iv) Supply

air(B)

(v)Provide

aesthetics(S)

Prevent

leakage(B)

(a) 400 mm

Trumpet in

polypropylene

material

(b) 400 mm

12.50 Trumpet in

HDPE material

(a) Al. body with

black outer

painting

(b) Al. body with

black plating

(c) Plastic –

(Nylon 6) body

11.00 in black color

(a) Al. body with

black outer

painting

(b) Al. body with

black plating

(c) Plastic –

(Nylon 6) body

5.75 in black color

4.00 (a) Hi-Nitrile

rubber seal

(b) Natural

rubber seal

Total

12.50

9.50 9.50 3.00

11.00

10.00

6.00 6.00 5.00

5.75

5.00

3.00 3.00 2.75

4.00

2.00 2.00

2.00

20.50 12.75

ValueGapin

CostUnits

S.

No Items Function(s)

ItemCost

inCostUnits

Possible

Alternatives of

Achieving the

Function(s)

Cost of

Alternatives

in Cost

Units

FunctionWorth (Cost

of Least CostAlternative)

in Cost Units

Legends: B—Basic function, S—Secondary Function.

4.5 Evaluation Phase

Various alternatives from Table IV were evaluated and tested. The details of evaluation

is given in the Table V.


4.5 Summary of Savings

Based on the Evaluation phase, a cost saving of 10.75 cost units, which is more than

the required drifting cost was attained. The savings are summarized in the Table VI.

Table V: Evaluation of Alternatives

1 Trumpet

2 Main

body

3 Back

cover

4 Seal

Change trumpet

material to

HDPE

Change Main

body material to

Nylon 6

Change Back

cover material to

Nylon 6

Do black plating

instead of painting

on back cover

Change Seal

material to

Natural rubber

All the conditions satisfied

and hence acceptable

(since no dimensional

changes are done, sound

function requirements

remain unaltered)

Concept acceptable

Due to creep loading, the

Back cover bulges out after

20 hrs of operation and

hence the idea is rejected

Concept acceptable based

on marketing feed back

Concept acceptable

S.

No ItemsProposed

ConceptAcceptance Criteria Outcome

(a) To withstand vibration

test as per IS-specification

(IS-1884)

(b) To be mouldable in

existing die-set

(c) No appreciable change

in outer finish

(a) To withstand 8 kg/cm2

pressure

(b) No air leakage/change

in sound after 100 hrs of

continuous operation @ 7

kg/cm2

(a) To withstand 8 kg/cm2

pressure

(b) No air leakage/change

in sound after 100 hrs of

continuous operation @ 7

kg/cm2

No appreciable change in

outer finish (based on

marketing feed back)

(a) To withstand water

immersion test for 24 hrs

(b) No air leakage

5. Conclusion

Based on the case study, the following are concluded:

• A cost reduction of 10.75 cost units, which is more than the drifting cost, has been

achieved and hence the Target cost requirements are satisfied.

S. No Items Existing Proposed Change Proposed Savings

Cost (Acceptable Concept) Cost (Cost Units)

1 Trumpet 12.50 HDPE 9.50 3.00

2 Main body 11.00 Nylon 6 6.00 5.00

3 Back cover 5.75 Al. body with black plating 5.00 0.75

4 Seal 4.00 Natural rubber 2.00 2.00

Total Cost Saving 10.75

Table VI: Summary of Savings


• A functional approach gives lot of insight about the product, which paves way for

value enhancement of this product and similar products.

• Target costing appears to be heavily relying on Value Engineering methodology

for an effective implementation.

• The study indicates this methodology may well be extended for similar type of

industries (Auto component manufacturers) and FMS.

6. References

1. Andrew Williamson, February 1997, “Target and Kaizen Costing”, Manufacturing

Engineer, pp. 22-25.

2. Gandhinathan R, Raviswaran N and Suthakar M, January 2004, “QFD Enabled

Target Costing – A VE Approach”, proceedings of the international conference on

Responsive Supply Chain, RSC 2004.

3. Harold G Tufty, 1982 , “Compendium on Value Engineering”, The Indo-American

Society.

4. ICWAI Southern India Regional Council, “Target Costing”, www.icwai.com/sirc/

features/target.asp

5. Larry W Zimmerman and Glen D Hart, 1982, “Value Engineering “, Van Nostrand

Reinhold Company Inc.

6. J O Quirmbach, M Wilke and E Igenbergs, “Cost Engineering with a Model

Based Design Process for Satellite Systems”, www.dutlsisa.lr.tudelft.nl/seinternet/

Lectures/PDCpapers/paper11.pdf

7. Jagannathan G, “Getting More at Less Cost—The Value Engineering Way”, TMH,

New Delhi, 1997.

8. Raviswaran N and Gandhinathan R, December 2002, “Re-Cyclable Packing—A

Value Engineering Approach to Achieve Target Cost in Automotive Industries”,

Proceedings of the International Conference on Operations Research Development

(ICORD), College of Engineering (Anna university), Chennai.

�

Reference # 07J-2005-05-03-01


9. Raviswaran N and Gandhinathan R, January 2003, “Achieving Competitive Edge

Through Value Engineering—A Toyota Based Target Costing Approach for Indian

Manufacturing Industries”, Proceedings of the International Conference on Digital

Aided Modeling and Simulation (DAMS).

10. Richard C Chen and Chen H Chung, Winter 2002, “Cause-Effect Analysis for

Target Costing”, Management Accountant quarterly.

11. Robin Cooper and Regine Slagmulder, Summer 1999, “Develop Profitable New

Products with Target Costing”, Sloan Management Review, pp. 23-33.

12. Robin Cooper and Regine Slagmulder, 1992, Target Costing and Value

Engineering, Productivity Press.

13. Yasuhiro Monden, 1992, Cost Management in the New Manufacturing Age,

Productivity Press.

Documents

Target Costing