target costing presen.tation final

7/23/2019 Target Costing Presen.tation Final

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Target CostingTarget Costing


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HistoryHistory Target costingTarget costingwas invented bywas invented byToyota in 1965Toyota in 1965

Target Costing is defned asa costmanagement tool or reducing the

overall cost o a product over itsentire lie-cycle with the help oproduction, engineering, researchand design


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Target CostingTarget Costing

Target costing: a costing method in whichTarget costing: a costing method in whichthe frm determines the allowable (i.e.,the frm determines the allowable (i.e.,target) cost or a prodct or ser!ice, gi!entarget) cost or a prodct or ser!ice, gi!ena competiti!e mar"et price and a targeteda competiti!e mar"et price and a targetedproftproft

Two options or redcing costs to achie!eTwo options or redcing costs to achie!ethe target#cost le!el:the target#cost le!el:

y integrating new manuacturing technologyy integrating new manuacturing technology

using advanced cost management techni!ues,using advanced cost management techni!ues,"such as #C$, and see%ing higher productivity"such as #C$, and see%ing higher productivity

y redesigning the product or serviy redesigning the product or servicece


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$mplementing Target$mplementing Target

CostingCosting

&etermine the mar%et price&etermine the mar%et price

&etermine the desired proft&etermine the desired proft

Calculate the target cost as mar%etCalculate the target cost as mar%etpriceprice less desired proftless desired proft

'se (value engineering) to reduce cost'se (value engineering) to reduce cost

'se %ai*en costing and operational'se %ai*en costing and operational

control to urther reduce costscontrol to urther reduce costs


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%ale%ale

&ngineering&ngineering

#naly*e trade-o+s between product#naly*e trade-o+s between product

unctionality "eatures$ and totalunctionality "eatures$ and totalproduct costproduct cost

erorm a consumer analysis duringerorm a consumer analysis during

the design stage o the new orthe design stage o the new or

revised product to identiy criticalrevised product to identiy critical

consumer preerencesconsumer preerences


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%ale &ngineering%ale &ngineering

(contined)(contined)

'or frms that can add and delete eatres'or frms that can add and delete eatres

easily,easily,functional analysisfunctional analysis (eamining the(eamining the

perormance and cost o each ma*orperormance and cost o each ma*or

nction or eatre o the prodct) can benction or eatre o the prodct) can besedsed

BenchmarkingBenchmarkingis oten used in this step tois oten used in this step to

determine which eatures give the frm adetermine which eatures give the frm a

competitive advantagecompetitive advantage oal. provide a desired level o perormanceoal. provide a desired level o perormance

without e/ceeding the target costwithout e/ceeding the target cost


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%ale &ngineering%ale &ngineering

(contined)(contined)

+esign analysis:+esign analysis:

'seul when the'seul when the frm that cannot add andfrm that cannot add and

delete eatres easilydelete eatres easily The design team prepares several possibleThe design team prepares several possible

designs odesigns o the product, each having similarthe product, each having similar

eatures with di+erent levels o perormance andeatures with di+erent levels o perormance and

di+erent costsdi+erent costs #ccountants wor% with the design team to#ccountants wor% with the design team to

choose one design that best meets customerchoose one design that best meets customer

preerences while not e/ceeding the target costpreerences while not e/ceeding the target cost


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ai-enai-en

ai-en (step f!e): sing continosai-en (step f!e): sing continos

impro!ement operational control toimpro!ement operational control to

redce costs in theredce costs in the manufacturing stagemanufacturing stageo the prodct lie#cycleo the prodct lie#cycle


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/enefts o Target/enefts o Target

CostingCosting

0ncreases customer satisaction "design is ocused0ncreases customer satisaction "design is ocusedon customer values$on customer values$ educes costs "more e+ective and e+icient design$educes costs "more e+ective and e+icient design$ 2elps the frm achieve desired proftability on new2elps the frm achieve desired proftability on new

and redesigned productsand redesigned products Can decrease the total time re!uired or productCan decrease the total time re!uired or product

developmentdevelopment educes (surprises) o the type, (3e did noteduces (surprises) o the type, (3e did not

e/pect it to cost that much444)e/pect it to cost that much444)

Can improve overall product !ualityCan improve overall product !uality acilitates coordination o design, manuacturing,acilitates coordination o design, manuacturing,

mar%eting, and cost managers throughout themar%eting, and cost managers throughout theproduct cost and sales lie-cyclesproduct cost and sales lie-cycles


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T012&T#C34T$52T012&T#C34T$52

61$5C$67&461$5C$67&4

1414 rice-led costingrice-led costing

44 ocus on customersocus on customers

7474 ocus on designocus on design8484 Cross-unctional involvementCross-unctional involvement

5454

alue-chain involvementalue-chain involvement6464# lie-cycle orientation# lie-cycle orientation


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0pproaches to target0pproaches to target

costingcostingrice-based targetingrice-based targetingCost-based targetingCost-based targeting

alue-based targetingalue-based targeting

# target cost is the ma/imum amount o# target cost is the ma/imum amount o

cost that can be incurred on a product4cost that can be incurred on a product4 Target Cost : ;ar%et rice < =/pectedTarget Cost : ;ar%et rice < =/pected

;argin;argin


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6rice#based targeting6rice#based targeting

>ets target cost or the product>ets target cost or the product

through comparison with that othrough comparison with that o

competitorscompetitors This means setting the price o theThis means setting the price o the

productproduct by observing what the mar%etby observing what the mar%et

will bear, then deducting the desiredwill bear, then deducting the desiredproft margin rom the price, andproft margin rom the price, and

thereby obtaining the target cost4thereby obtaining the target cost4


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Cost#based targetingCost#based targeting

0t sets the cost 1st, then the desired0t sets the cost 1st, then the desired

proft marginproft margin isisderivederiveddat the priceat the price

o the product4o the product4

This metThis method re!uires the suppliershod re!uires the suppliers

to reveal the very details o theirto reveal the very details o their

cost structurecost structureandandwill sour thewill sour the

buyer-supplier relationshipsbuyer-supplier relationships so itsso itsnn??ttgood or the long rungood or the long run44


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%ale#based targeting%ale#based targeting

0t0t sets the price by what it thin%s thesets the price by what it thin%s the

mar%et will @value? the productmar%et will @value? the product

#ter that, the producer sets the#ter that, the producer sets the

desired proft margin and then triesdesired proft margin and then tries

all ways to %eep the cost below thatall ways to %eep the cost below that

o the target cost4o the target cost4


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The Cost 7ie Cycle

ACost lie cycle reers to the ollowingse8ence o acti!ities:

B&&esign;anuacturing "or providing theservice$;ar%etingdistributionCustomer service

A$t is the lie#cycle o a prodct orser!ice rom the !iew oint o costs


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9pstream 0cti!ities +ownstream0cti!ities

1+ 1+ +esign +esign anactring anactring ar"eting

and

+istribtion

ar"eting and

+istribtion

Cstome 4er!ice

Cstome 4er!ice

The Cost 7ie#Cycle(contined)

Design decisionsaccount or much o total product liecycle costs


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The 4ales 7ie#Cycle

A4ales lie cycle is the se8ence o phases inthe prodcts or ser!ices lie:

0ntroduction o the product or service to themar%et

rowth in sales

;aturity

&ecline3ithdrawal rom the mar%et

A $t is the lie#cycle o a prodct or ser!icerom the !iewpoint o sales !olme achie!ed


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$ntrodction

2rowth atrity

+ecline

Tim

e

4

ale

s

0mportantstrategic

costmanagemen

t issuesarise in each

stage o thelie-cycle4

target costing presen.tation final

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