TARGET COSTING AND PRODUCT LIFE CYCLE

• AKASH PRATAP• AKSHI BHAGIA• AMANPREET SINGH• ANSHUL CHHABRA

MADE BY:

PRICING DECISIONS DEPEND ON

• CUSTOMERS

• COMPETITORS

• COSTS

METHODS OF COST CONTROL

• TARGET COSTING

• PRODUCT LIFE CYCLE COSTING

TARGET COSTING DEFINITION

Structured approach for determining the cost at which a proposed product of specified functionality and quality must be produced to achieve a desired level of profitability at its anticipated selling price

ORIGIN OF TARGET COSTING

• Emerged in japan in 1960’s as a consequence of difficult market conditions.

• Specialized tools including functional analysis, value engineering, value analysis, and concurrent engineering were introduced to support target costing.

• Widely practiced in Japan now

OBJECTIVES OF TARGET COSTING

• Lower the cost to ensure profit levels

• Meet the level of quality, delivery timing and price required by the market

• Motivate all employees to meet target costs of new product and make target cost company-wide profit-management activity

TRADITIONAL COSTING

BASICS:

• MARKET-DRIVEN PRICING

• TREAT COST AS INDEPENDENT VARIABLE IN PRODUCT REQIREMENTS

• PROACTIVELY WORK TO ACHIEVE TARGET COST DURING PRODUCT AND PROCESS DEVELOPMENT

TARGET COSTING

STEPS OF TARGET COSTING

1. Study market

2. Set target price

3. Determine target costs

4. Balance the target costs with requirements

VALUE ENGINEERING

• Examination of factors affecting the cost of the product and devising a means to achieve its specific purpose at the required standards of quality and reliability at acceptable costs

• Encompasses improvement in product design

changes in material specification

modification in process methods

MAIN FEATURES OF TARGET COSTING SYSTEM

• Integral part of design and introduction of new products

• Target price is determined using various sales forecasting techniques

• Establishment of target production volume

• Determination of cost reduction targets

• Series of intense activities to translate cost challenge to reality

ADVANTAGES OF TARGET COSTING

• Reinforces top to bottom commitment to process and product innovation

• Market success

• Products better matched to customer needs

• Aligns cost of feature to customers willingness to pay for them

• Reduces development cycle

• Reduces cost of product significantly

• Increases team work among internal organizations

• Engages customers and suppliers in better product design and to more effectively integrate the entire supply chain

PROBLEMS WITH TARGET COSTING

• Process can be lengthened to considerable extent

• Finger pointing in various parts of company

• More difficult to reach consensus

IMPACT ON PROFITABILITY

• Emphasis on product cost throughout life cycle of product

• Precise targeting of correct prices

COMPANIES THAT USE TARGET COSTING

• General Electricals

• Motorola

• The US auto companies : General Motors, Ford, and (Daimler) Chrysler

• All Japanese auto companies including: Toyota, Nissan, Honda, Mitsubishi

• NASA

• The US Military

• Sony

PRODUCT LIFE CYCLE DEFINITION

• Sum of all recurring and one-time (non-recurring) costs over the full life span or a specified period of a good, service, structure or system

• Includes purchase price, installation cost, operating costs, maintenance and upgrade costs and remaining at the end of ownership

FEATURES OF LIFE CYCLE COSTING

• Includes Non-production Costs.

• The development period for R&D and design is long and costly

• Many of the costs predicted to be incurred over several years in production, marketing, distribution and customer service are locked in at the R&D and design stages.

LIFE-CYCLE COSTING PROCEDURES

• Best form of costing from a planning standpoint

• Cannot be used for financial reporting

• Costs must be calculated from the point of the initial idea for the product, until the product is no longer made

PHASES IN PRODUCT LIFE-CYCLE:

INTRODUCTION PHASE

• Product is put on the market and its awareness and acceptance are minimal.

• Promotional costs will be high, sales revenue low and profits probably negative

• Sales of new products usually rise slowly at first.

• May last from few months to a year

• Retarding factors

GROWTH PHASE

• Product penetrates into the market and sales increase

• Product begins to make profit contribution

• To sustain growth, consumer satisfaction must be ensured

• Factors for acceleration

larger pools of imitators

market is broadened by market segmentation, product differentiation and higher levels of promotion

product improvements

number of distributors increase

MATURITY PHASE

• Sales cease to rise exponentially

• Market saturation

• No new distribution channels to fill.

• Profits decline due to

competitive products.

innovators find market leadership under growing pressure.

Potential cost economies are used up

Prices begin to soften

DECLINE PHASE

• Declining sales due to

product substitution

Fashion and changing tastes

Exogenous cost factors reducing profitability

CHARACTERISTICS OF PRODUCT LIFE CYCLE

• products have finite lives and pass through the cycle of development, introduction, growth, maturity, decline and deletion at varying speeds

• Product cost, revenue and profit patterns tend to follow predictable courses through the product life-cycle.

• Profit per unit varies as products move through their life-cycles.

• Each phase requires different strategic action

Customer Life-Cycle Costs

• Total costs incurred by a customer to acquire and use a product or service until it is replaced.

• For example, a car include the cost of the car itself plus the costs of operating and maintaining the car minus the disposal price of the car

• An important consideration in pricing decision of a product

BENEFITS OF PRODUCT LIFE-CYCLE COSTING

• Earlier actions to generate revenue or to lower costs than otherwise might be considered

• More accurate and realistic assessment of revenues and costs

• Considers total incremental costs over the entire life span of a product,

• Easy for management to recognize the profit implications of design changes, product obsolescence, price variations and so on in isolation, for a particular product.

• Management of environmental costs.

ORIENTAL SCIENCE APPARATUS WORKSHOP

• Established in 1919

• Spread over an area of 6000 sq. yds.

• Serves laboratory needs ranging from Schools, Colleges, Universities to Industries both in the domestic and international markets

• Numerous Export Excellence Awards.

• Prestigious place in the USA, Europe, Middle- East, South- East Asia and African countries

COSTS ASSOCIATED WITH THE PRODUCT

• Direct cost- Direct material, direct labor, Direct Supervisory costs , Packaging ,Paintin , Plating, Wooden box

• Indirect costs- Advertisements, Delhi office, Telephones, Administrative costs, Electricity and generator, Bank Interest ,Traveling/Marketing /Entertainment,Senior Management people's salaries,Vehicles running maintenance ,depreciation of plant and machinery /vehicles /buildings /computers/furniture

METHODS OF TARGET COSTING IN OSAW 

• First the target price is ascertained.

• Costing done as per conventional methods.

• Work-study

possible reduction/removal of avoidable processes during the manufacture

e g it is of no use to polish a surface and then roughen it, or first drilling a hole and then boring the hole in a work piece when you could get a drill of the final size straightaway.

• Make or buy decision- Sometimes it is cheaper to buy out the complete item or subassembly from smaller units or units which have an expertise in a particular line.

• Look for possibility of reduction in cost by optimizing the quantity.

INTRODUCTION

OSAW made the Epidiascope in 1959 for the armed forces, Police and medical colleges It is a device to magnify the image/printed matter in a magazine. Initially

• The price was high

• People were not familiar about the applications

• People did not know where to buy it from

• People were sceptical about it's working

As the product was sold to some premier institutes like PGIMER Chandigarh , AIIMS DELHI ,BSF , Ministry of Defence and it was also exhibited in various exhibitions at Pragati Maiden /Medical colleges, people became aware of the product features, pricing , working

GROWTH

• People applied for finance and the sales grew.

• A stage came when each and every dept of PGIMER Chandigarh had an epidiascope( about 54 pieces) .

• Many other college profs who came to PGI introduced it to their college and each college bought 2-3 units. Production was not keeping pace with the growing demand. This was the growing stage

MATURITY

• Who had already bought it did not need it again.

• Other manufacturers started making the same item.So

• After 1973 ,the sales started being in a straight line i e mature stage.

• The sales had increased from just 10-20 units in 1959 to about 1000 units in 1973.Till 1985, the sales were more or less constant

DECLINE

• In 1985 advent of VCR and video camera. They were handier and could record moving objects and up to 180 minutes

• The still photography was being replaced.

• The sales of epidiascope started going down and by 1988 the sales were reduced to merely 20% of the peak i e 200 units a year.