target & lcc

8/8/2019 Target & LCC

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TARGET COSTINGAND LIFE CYCLE COSTING


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ORIGIN

qT h e c o n c e p t o f T a r g e t Co s t i n g w a s i n v e n t e d i nJ a p a n b y T o y o t a i n 1 9 6 0 .

q

qIn Japan, target costing is widely practiced in more than 80% of

the companies in the assembly industries and more than 60%of the companies in processing industries.

q

qA range of specialized tools, including functional analysis, value

engineering, value analysis and concurrent engineering wereintroduced to support the target costing. This made Japanesecompanies particularly effective in the area of product designand development.


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DEFINITION

Target costing can be defined as a

structured approach to determine the cost atwhich a proposed product with specifiedfunctionality and quality must be produced togenerate a desired level of profitability at itsanticipated selling price.


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q

Target costing can also be defined as:

qTarget costing is a management technique aimed atreducing a products life cycle costs.

qTarget costing is a disciplined process that uses data andinformation in a logical series of steps to determine andachieve a target cost for the product. In addition, the

price and cost are for specified product functionality,which is determined from understanding the needs of

the customer and the willingness of the customer to payfor each function.


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Target costing is a formal process that attempts tomatch a proposed products feature (benefits) with a viablemarket price that achieves the companys profitability

goals by:

qDetermining a price point (or range of prices) for anapproximate combination of features and benefits.

qSubtracting a desired profit from the market price to determinethe maximum bearable level of costs.

qIterating the product design eliminating or reducing unnecessaryattributes with costs that cant be recovered in higher prices

until the cost target is apt.

qRevising the market price for the redesigned product in view ofchanged market conditions.


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Make the Decision

Achi

eve

targe

tcost?

Close

enou

gh?

Release

design

for production

Abort

project

Repea

t

value

engr.?

Value

engineering

Yes

No

Yes

No

No

Yes

Begin


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Traditional Method

Traditionally, manufacturers would make use of the cost plus approach to estimate the product price. A starting pointfor them would be to conduct market research to determine itsmarket segments preferences and hence its productscharacteristics that will meet the customers needs. This will

be followed by the design of the product.

Next manufacturers process is determined. Vendors will then be contacted to identify the total costs of the components

which are required by the design and engineering departments.Finally, cost components are summed up and a selling price isset based on the costs and profit.


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Target CostingTarget costing derives an allowable product cost by first carryingout market research to predict what the market segment iswilling to pay for the desired product with specificcharacteristics.

Subtracting the desired profitmargin set by the managementfrom the predicted selling price, maximum target cost is arrived

at. This target cost is then compared to an expected product costand if it is higher than the expected product cost, the companyhas several options like:

qFirst, to lower costs, the product design and or the engineeringprocess can be changed.

qSecondly, the management might consider accepting a less thandesired profit margin.

qThird, alternative would be to abandon that particular product.


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TARGET-COSTING PRINCIPLES1. Price-led costing: Market prices are used to determine allowable--or target--costs. Target

costs are calculated: market price - required profit margin = target cost.

2. Focus on customers: Customer requirements for quality, cost, and time are simultaneouslyincorporated in product and process decisions and guide cost analysis. The value of anyfeature and functionality built into the product must be greater than the cost of providingthose features and functionality.

3. Focus on design: Cost control is emphasized at the product and process design stage.Therefore, engineering changes must occur before production begins, resulting in lowercosts and reduced "time-to-market" for new products.

4. Cross-functional involvement: Cross-functional product and process

teams are responsible for the entire product from initial concept through final production.

5. Value-chain involvement: All members of the value chain--e.g., suppliers, distributors,service providers, and customers--are included in the target costing process.

6. A life-cycle orientation: Total life-cycle costs are minimized for both the producer and thecustomer. Life-cycle costs include purchase price, operating costs, maintenance, and

distribution costs.


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Establishing the Target Cost

Product Life

Stage

Unit

Cost

Gradual decline asvolume increases

Competitors enter market,

straining supply of resources

Unexpected events affectcost of resources


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Objectives of Target Costing Its main objective is to check the cost early in the

design and development cycle, rather than during thelater stages of product development and production. Itsemphasis are:

To lower the costs of new products so that the requiredprofit level can be ensured.

The new products meet the levels of quality, delivery

timing and price required by the market.

To motivate all company employees to achieve the targetprofit during new product development by makingtarget costing a company wide profit managementactivity.


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dvantages of Target Costing

1. It reinforces top to bottom commitment process and productinnovation, and is aimed at identifying issues to be resolved, inorder to achieve some competitive advantages.

2. It helps to create a companys competitive future with market-driven management for designing and manufacturing productsthat meet the price required for the market success.

3. It uses management control system to support and reinforce

manufacturing strategies; and to identify market opportunitiesthat can be converted into real saving to achieve the best valuerather than simply the lowest cost.


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4. Assure that products are better matched to their customers needs.

5. Align the costs of features with customers willingness to pay forthem.

6. Reduce the development cycle of a product.

7. Reduce the costs of products significantly.

8. Increase the teamwork among all internal organizations associatedwith conceiving, marketing, planning, developing, manufacturing,selling, distributing and installing a product.

9. Engage customers and suppliers to design the right product and tomore effectively integrate the entire supply chain.


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Disadvantages of Target CostingTarget Costing has a few problems that one should be aware of andguard against. These problems are as follows:

q TIME CONSUMING LENGTHY PROCESS.

q

qDISCONTENT AMONG EMPLOYEES OF OVERBURDENEDDEPARTMENTS.

q

qDIFFICULT TO REACH CONSENSUS.

qPOSSIBLE MISUSE OF TECHNIQUE.

q

q


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Impact of Target Costing onProfitability

Target costing can have a large positive impact on profitability,depending on the commitment of management to its use, theconstant involvement of cost accountant in all phases of a

products life cycle, and the type of strategy a company follows.

Target costing improves profitability in two ways :q

qIt places such a detailed continuing emphasis on productcosts throughout the life cycle.

q

qIt improves profitability through precise targeting of the correctprices at which the company feels it can place a profitableproduct in the market place that will sell in a robust manner.

q

q


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Kaizen Costing

It was developed in quality assurancetechnology.

The time preceding kaizen costing is calledTarget costing.

Collectively, these two concepts make up LCC. It is also maintenance of the present cost

levels for products currently beingmanufactured via systematic efforts to

achieve the desired cost level.


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Kassal ManufacturingPvt Ltd

Plot No: 156/10Phase 2 Industrial

Area, Chandigarh


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Kassal Manufacturing Pvt Ltd is a

diverse company, which is involved invarious businesses. One of itscompetencies is in the production of

nuts and bolts which include Castle,Slotted and Nylock with differentdimensions.


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Characteristic Ours TargetPrice (Rs/kg.) 600 599

Product Characteristics:Target Selling Price = Rs 599/kgDesired Profit = Rs 100/kg

Hence, target cost should be Rs 499/kg

Material Cost Rs. 125*80=10000

Labour Cost Rs.1420*7=9940

Burden Cost Rs.4320

Electricity and Misc. Cost Rs. 5680

Total product cost Rs. 29940


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Material cost is Rs 125/kg and a batch of 60kgs takes approximately 7 days and 80kgs of raw material tomanufacture.

Labour Cost:

Unskilled Labour:Rate = Rs 180/day

Number of hours used = 8 hoursNumber of workers = 3Total unskilled labour charges = Rs 540

Skilled Labour:

Rate= 220/dayNumber of hours used = 8 hoursNumber of workers = 4Total skilled labour charges = Rs 880Total labour charges =Rs 1420For a batch of 60 kgs the labour works for 7 days.

Burden Cost:

It includes Quality control, tool room, machine maintenance, material control, production supervision and freightcharges.

Electricity and Misc. Cost: It includes cost of electricity for the production and other expenses.Electricity Cost: Rs 4959Per unit cost of electricity: Rs 4.5

Number of units consumed: 1102 unitsMisc Cost: Rs 721


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Life Cycle Costing

Life cycle costing is a system thattracks and accumulates the actual costsand revenues attributable to cost object

from its invention to its abandonment.Life cycle costing involves tracing costand revenues on a product by product

basis over several calendar periods.


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In essence, Life Cycle Costing is a means of estimating all thecosts involved in procuring, operating, maintaining and

ultimately disposing a product throughout its life.It is also known as managing costs from the cradle to thegrave.


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Stages of Total-Life-Cycle Costingq

Research Development and Engineering CycleqManufacturing Cycle

qPost-Sale Service and Disposal Cycle


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Research Development and Engineering Cycle The research development and engineering (RD&E) cycle has three

stages:

q Market research, where emerging customer needs are assessed andideas are generated for new products.

qq Product design, in which scientists and engineers develop the

technical aspects of products.

qq Product development, in which the company creates features critical

to customer satisfaction and design prototypes, production processes,and any special tooling required.

By some estimates, 80% to 85% of a products total life costs arecommitted by decision made in the RD&E cycle of the products life.

For Example: Decisions made in this cycle are critical, because an


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Manufacturing Cycle

After the RD&E cycle, the company begins themanufacturing cycle in which costs are incurred in theproduction of the product.

Over the past decade, in an effort to reduce costs, companieshave used management accounting methods such as activity-

based cost management to identify and reduce non value-addedactivities.


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Post-Sale Service and DisposalCycle Disposal occurs at the end of a products life and lasts until the

customer retires the final unit of a product.

q Stages of theTotal Life Cycle

Costs

100%

80%

60%

40%

20%

0%

Research development andengineering cycle

Cost committed

Manufacturing Post-saleservice anddisposal

Cost incurred


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Life Cycle Costing Process

It is a three staged process. The first stage is life cost planning which includes planning LCC, Selecting andDeveloping LCC model, applying LCC Model and finallyrecording and reviewing the LCC results. The second stage is the

life cost analysis preparation stage followed by third stageimplementing and monitoring life cycle cost analysis. The threestages are:

stage 1 2 3

LCCPlanning

Life costanalysispreparation

Implement andmonitor life cyclecost analysis


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Stage 1: LCC Planning

Life Cycle cost planning concerns the assessment

and comparison of option/alternatives during thedesign/acquisition phase.

q

qq

q

qqConsiders all cost components within the assets life.

qqDoes not directly consider benefits or revenue streams

that are generally assumed to be equal amongst theoptions being compared (benefits and revenues are

Recording & reviewing LCCResults

Development of Plan

Select LCC Model

Implement LCC Model

Step 4

Step 3

Step 2

Step 1

St 2 Lif C t A l i


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Stage 2: Life Cost AnalysisPreparation

The operation of Life Cost Analysis involvesreview and development of the LCC Modelas a real-time or actual cost controlmechanism. Estimates of capital costs will

be replaced by the actual prices paid.Charges may also be required to the costbreakdown structure and cost elements toreflect the asset components to bemonitored and the level of detail required.

St 3 I l ti d


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Stage 3: Implementing andMonitoring

Implementation of Life Cost Analysis involvesthe continuous monitoring of the actualperformance of an asset during its operationand maintenance to identify areas in which

cost savings may be made and to providefeedback for future life cost planningactivities

For example, it may be better to replace anexpensive building component with a moreefficient solution prior to the end of its usefullife than to continue with a poor initialdecision.


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Benefits of Product Life Cycle Costing


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Benefits of Product Life Cycle Costing

q It results in earlier action to generate revenue or lower costs than otherwise might beconsidered. There are a number of factors that needs to be managed in order tomaximize returns in a product.

q

q

q

q

q

q

q

q

q

q

q Better decisions should follow a more accurate and realistic assessment of revenuesand costs with in a particular life cycle stage.

q

q It can promote long term rewarding in contrast to short term profitability rewarding.


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IDS INFOTECH Pvt Ltd

C-138, phase-8, Industrial area,Mohali


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qIDS infotech is an IT company dedicated for providing IT, ITes, publishing, healthcare, software and engineering services. Ithas its international offices located in Europe and USA.

q

qIn this data we have the information about the total cost incurredduring the life cycle of an air conditioner. This price wasobserved by the company after taking into account of prices of

various AC manufacturing companies and best suited to theirenvironment.

q

qThe company does this as it plans to build a new office in IT

park where installation of few ACs would be required. Wehave compared window and split AC of different ratings.According to the need the appropriate AC would be installed.

q


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Air Conditioner A B C DType window window Split SplitCapacity 1.5 ton 1.5 ton 1.5 ton 1.5 tonRating * ** * **Purchase Price (Rs) 15,000 17,500 25,000 27,500VAT @ 4% 600 700 1000 1100

Freight 200 200 200 200Installation 300 300 1000 1000Warranty 12 months 12 months 12 months 12 monthsRunning per day 10 hours 10 hours 10 hours 10 hoursAverage Electricity Cost per unit for 7years (commercial)(Rs)

4.5 4.5 4.5 4.5

Units Consumed per month (25working days)

600 500 600 500

Units Consumed per year (7 monthsworking Apr-Oct) 4,200 3,500 4,200 3,500

Uptime (95%) 3,990 3,325 3,990 3,325

Cumulative units consumed @10%increase/annum for 7 years

35,702 29,752 35,702 29,752

Electricity Expenses (Rs) 1,60,659 1,33,884 1,60,659 1,33,884AMC (Rs) 1,200 1,200 2,000 2,000Cumulative cost of AMC inclusive of

10% increase every year for six years

9,325 9,325 15,541 15,541

Depreciation @ 20%/year for 7 years(Rs)

12,340 14,397 20,566 22,623

Salvage Value (Rs) 3,260 3,803 5,434 5,977Total Value 1,82,824 1,58,106 1,97,966 1,73,248

In this case we will select B if there is provision for a window AC otherwise

well go for D.


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ACCUTRONICS(SCO 145-146,

Sector 8 C,Chandigarh)


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Accutronics are engaged in supply of a wide range of medical products.Precision designed in sync with international quality standards.Getting established in the year 1989, ACCUTRONICS was established toundertake, various works with Private Institutions, Govt. and Semi Govt.Departments i.e. to make presentations, to prepare and submit proposals, followup, liaison with all concerned and to provide support to the products sold, duringthe warranty and the Post warranty period. The benchmark was the performance.

Product RangeSynonymous with reliability, quality and functionality, our complete range ofmedical equipments caters to the demands of following:Respiratory Humidification ProductsNeurosurgery productsRadiology

Ultrasound MachinesENT ProductsIT Services


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CurrentProduct

PresentCost

ExpectedCost Wk1

ExpectedCost Wk5

ExpectedCost Wk9

ExpectedCostWk13

TargetCost

Delta withExpected

ExpectedCost

I-Assay 2,035.98 2,035.98 2,035.98 2,035.98 1,800 1,600 200 1,800

CLA 1,559 1,900 1,650 1,650 1,650 1,650 0 1,650

CLA Adaptor NA 30 30 10.5 10.5 10 0.5 10.5

Control Board 53.2 120 120 120 116.5 100 16.5 116.5

InterfaceBoard

NA 150 150 150 110 120 10 110

PCB AssemblyMaterial

NA 20 20 15 15 15 0 15

Cable fromCameras to IP

NA 10 10 10 2 5 3 2

Cover 156.23 100 100 100 100 75 25 100

Misc. 86.54 50 50 50 50 50 0 50

Balance WeighNA 25 25 25 25 25 0 25

Labour CostsSubsystem

356.45 100 100 100 115 100 0 100

Total 4,257 4541 4291 4266.5 3994 3,750 229 3,979

All prices in USD


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Thank You

Any Queries??

Presented By:

Abhinav Madra

Ankush Singla

Aurnob Chakraverty


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ZEN ENTERPRISESZen EnterprisesIndustrial Area, Phase-II, Chandigarh

Zen Enterprises is located in Industrial Area, Phase-II, Chandigarh. It

started from manufacturing of Plugs from year 1996. These are madeof Bakelite by the process of heating under controlled pressure. Theseare produced under the License from Bureau of Indian Standard (BIS).These are supplied to Delhi, Hoshiarpur, Chandigarh, Panchkula forusage in Electrical gadgets. Further addition to the manufacturing has

been added by the production of Leeds and Rotary Switch for Iron,

Fans, Toasters and other electrical appliances.


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SIGN PRICE/COST ELEMENT ESTIMATE %FACTOR AMOUNT IN (Rs.)

Selling Price to Retailer 55776

- Distribution Cost/Mark-up 15 8366

- Shipping/Logistic Cost to Distribution Centre 0

= Manufacturers Selling Price 47410

- Profit Margin 10 4741

- Warranty Cost 0

- Corporate Allocation 5 2370.50

- Business Unit Selling, General & Administrative 10 4741

Non-Recurring Development Cost 1,00,000

Estimated Production Volume 11,620 Pcs.

- Allocated Non-Recurring Development Cost 50

= Business Unit Target Cost 35507.50

- Overhead 20 7101.6

= Direct Target Cost(Labour & Material) 28406

TARGET COST CALCULATION WORKSHEET MONTHLY:Estimated cost per piece = Rs. 6/-

target & lcc

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