Download - presantation on target costing
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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