target pricing final

8/3/2019 Target Pricing Final

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An approach used to identify the

anticipated selling price for product as well

as the allowable price for each component


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Companies can use Target Pricing to create

products that are competitively priced while still

maintaining a companys desired profit margin.

Target Costing is a part of Target pricing and has

many advantages in cost containment and

eliminating unneeded costs.

It helps make sure that money spent on the

product is justified.


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The goal of Target costing is:

o Design a product following a set cost structure

o Cut unnecessary costs

o Improve product design


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Determineanticipatedselling price

Identifydesired

profitmargin

Calculateallowableprice foreach unit

component

Component#1

Component

#2

Component#3

Target pricing/costing is based off this simple

equation:


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Determine Target Price & Desired Profit Margin

Perform Market Research & Identify Customer Needs

Part 1 - Analysiso Begin by researching the target market and consumero Determine a target price that consumers expecto Determine how much profit margin you expect

Example Tata Nanoo Tata motors produces passenger cars like Indica and Indigoo Cheapest passenger car in India Maruti Alto starts at Rs. 2.4 lacs. Tata wants to sell a

car at Rs. 1 lac i.e. the Nanoo Tata wants to earn a 20% margin (approximate) on the Nanoo With an target sell price of Rs. 1 lac, a 20% margin, Tata can spend Rs. 80,000 to create a

Nano


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Explore Different Product Design Alternatives

Develop Cost Projections for Each Component

Perform Value Engineering / Value Analysis

Part 2 - Designo Once an overall cost allowance is calculated, determine cost projections for each

component within the producto Design the component within the allocated cost budget

o Value Engineering / Value Analysis (VE/VA) for each component asks whether the part canbe substituted, simplified, or eliminated

Exampleo Component cost reduction at vendor levelo Hollow steering column as the engine was on the back of the caro Fixed hatch, trunk is accessible only from inside

o No power steering, due to light weighto One windscreen wiper


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Production

Continuous Cost Reduction

Perform Value Engineering / Value AnalysisApproved

final product

design

Part 3 - Implemento Once a final product is design that meets the allocated cost budget production begins

o Continue to re-evaluate the product design using VA/VE to continue cost reductions

Exampleo Achieve high volumes to further reduce costs through economies of scale.o Approximately 20 companies supply 70% of the total parts promoting centralization of

purchases and cost reduction.


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Determine Target Price & Desired Profit Margin

Perform Market Research & Identify Customer Needs

o Volkswagen launched Polo in January 2010 at a base price of 4.3 lacs.o After Polos success Volkswagen eyed the mid segment sedan market dominated by Honda

City in 2010.o Thus, Vento A sedan version of Polo was launched with a base price of 7 lacs.o Thus value was added to a 4.3 lack product to make it a 7 lac product ( minus profit

margins)


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Explore Different Product Design Alternatives

Develop Cost Projections for Each Component

Perform Value Engineering / Value Analysis

o Vento uses metallic grilles and lighto The third section or boot is well integrated with the body.o The engine size was increased from 1.2l to 1.6l in base petrol (trendline) models.o Better breaking system, tubeless radials and comfort features in the interiors.


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Accounting for Management, Target Costing Approach to Pricing, Apr 8, 2010,

http://www.accountingformanagement.com/target_costing_pricing_products_and_services.htm

All Business A D&B Company, Managerial implications of target costing Apr 6, 2010,

http://www.allbusiness.com/accounting-reporting/methods-standards-cost-accounting/846519-

1.html

Management Accounting Quarterly, Best Practices in Target Costing, Apr 7, 2010,

http://www.imanet.org/pdf/1236.pdf

ISM, Target Costing Model, Apr 8, 2010, http://images.google.com/imgres?imgurl=http://www.npd-

solutions.com/image33.gif&imgrefurl=http://www.npd-

solutions.com/target.html&usg=__iiMpHaeUC8MEhTdCrdQLiSX-

0A8=&h=275&w=361&sz=5&hl=en&start=1&itbs=1&tbnid=8DLY8XciaXc3lM:&tbnh=92&tbnw=121&p

rev=/images%3Fq%3Dtarget%2Bcosting%26hl%3Den%26safe%3Dactive%26sa%3DN%26gbv%3D2%26ndsp%3D20%26tbs%3Disch:1

Yasuhiro Monden and Kazuki Hamada, "Target Costing-Kaizen Costing in Japanese Automobile

Companies," Journal of Management Accounting Research 3, pp. 16-34.

ET, Tata Nano: Thin margins worry dealers, Jan 12, 2008

http://articles.economictimes.indiatimes.com/2008-01-12/news/27710914_1_tata-nano-tata-

motors-dealer-premium-cars

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