Target costing
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Transcript of Target costing
Introduction Target Costing is a process of developing costs for a product (or
services) based on market driven considerations.
A method that allows firms to provide consumers with products that they want, at a price they can afford, and still earn desired financial returns.
Key Attributes
Price Led Costing
Customer Focus
Focus on design of products and processes
Life Cycle cost reduction
Value Chain involvement
Application
To start from the market and work back to production process, through design and development of product that customer needs at acceptable prices.
It is applied in the design and development stage.
Target Cost of a product = Target selling price less Target Profit
Value Engineering is a key to achieving target costs.
It is a systematic evaluation of all aspects of production and marketing that starts from R&D, Design of products, and distribution to customers, ending with customer service.
Target costing is widely used by Japanese and American Industries in automobiles (Toyota), Electronics (Panasonic), Information Technology (Apple).
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Target Costing Characteristics 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 to these questions before committing to the project
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
Saves costly changes later on
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Target 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
Forces consideration of manufacturability
Reduces the need for subsequent changes
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Target Costing Characteristics
Cost control at all phases of the product life cycle
Design
Production
Delivery/setup
Customer’s cost of ownership
Emphasizes future sales instead of current cost savings
Service and repair
Disposal and recycling
Traditional costing process model
Product RequirementProduct Requirement
Product Design and Development
Product Design and Development
Supplier Cost EstimatesSupplier Cost Estimates
ProductionProduction
Process Design & Product Cost Estimates
Process Design & Product Cost Estimates
Cost is too highCost is too high
Target costing process model
Market Research
Product Strategy and profit plan
Product Design and Development
Production and LogisticsProduction and Logistics
Competitive Strategy and Intelligence
Value Engineering
Voice of Customer Establish and Attain Target cost
SalesSales
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Target 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 Cost
Determine the selling price
Must be acceptable to the customer
Must be able to withstand competition
Techniques
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 Cost
Determine the product and its market
Who is the target market?
What do they want?
What do competitors offer?....Benchmarking
Introduce concept or prototype
Evolutionary or revolutionary?
Refine until it meets customer needs
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Establishing 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 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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Achieving 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 Cost
Rank customer requirements (exhibit 1)
What does the customer want?....Voice of Customer
How important is each function to the customer?
What do we and our competitors currently offer? Competitive evaluation (exhibit 1)
Do our current product features meet the customer needs?
Are the customers’ needs met, unmet or exceeded?
What can we learn from our competitors’ products?
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Achieving the Target Cost
EXHIBIT 1CUSTOMER REQUIREMENT RANKINGS
Less More Raw % of Total
Customer Requirement Important Score Raw Score
1 2 3 4 5 1 2 3 4 5
Multiple speeds 4 4 14.8%
Horizontal oscillation 3 3 11.1%
Vertical oscillation 1 1 3.7%
Light weight 4 4 14.8%
Adjustable height 1 1 3.7%
Airflow capacity 4 4 14.8%
Quietness 5 5 18.5%
Compact size 3 3 11.1%
Looks nice 2 2 7.4%
Total 27 100%
Us
Competitor
Both
Important
Competitive
Comparison
Ranking
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Achieving 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 Cost Decompose the cost gap (exhibit 2)
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 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 Cost
EXHIBIT 2COST GAP BREAKDOWN BY LIFE CYCLE AND VALUE CHAIN
Life Cycle
Target Current Gap Target Current Gap Target Current Gap
Research and development 0.30$ 0.50$ 0.20$ 0.30$ 0.50$ 0.20$
Manufacturing 4.00 5.00 1.00 13.00$ 15.00$ 2.00$ 17.00 20.00 3.00
Marketing and distribution 1.50 2.00 0.50 4.50 5.00 0.50 6.00 7.00 1.00
Service and support 0.25 0.50 0.25 0.25 0.50 0.25
General administration 0.75 1.00 0.25 0.75 1.00 0.25
Total 6.80$ 9.00$ 2.20$ 17.50$ 20.00$ 2.50$ 24.30$ 29.00$ 4.70$
Internal Costs External Costs Total Costs
Value Chain
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Achieving 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 (exhibit 3)
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 Cost
EXHIBIT 3COMPONENT COST BREAKDOWN
Percent of
Component Function Cost total cost
Motor Turns blade 8$ 40%
Transmission Provides oscillation capabilities 4 20%
Speed control/switch Controls blade speed 3 15%
Body Houses motor, transmission, speed control 2 10%
Blade Moves air 1 5%
Blade guard Protects blade from contacting objects 2 10%
Total 20$ 100%
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Achieving the Target Cost Relate the components to customer requirements
(exhibit 4)
Develop Quality-Function-Deployment matrix
Indicates which components have the greatest impact on customer requirements
Develop a functional ranking (exhibit 5)
Indicates the importance of each component to the customer
Based on the component’s contribution to providing the desired functions
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Achieving the Target Cost
EXHIBIT 4QUALITY-FUNCTION-DEPLOYMENT (QFD) MATRIX
Speed Blade
Motor Transmission control Body Blade guard
Multiple speeds
Horizontal oscillation
Vertical oscillation
Light weight
Adjustable height
Airflow capacity
Quietness
Compact size
Looks nice
Strong correlationModerate correlationWeak correlation
Components
Customer Requirements
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Achieving the Target Cost
EXHIBIT 5COMPONENT CONTRIBUTION TO CUSTOMER REQUIREMENTS
Customer Requirements Speed Blade
Motor Transmission control Body Blade guard
Multiple speeds 40 X 14.8 = 5.92 60 X 14.8 = 8.88
Horizontal oscillation 80 X 11.1 = 8.88 20 X 11.1 = 2.22
Vertical oscillation 80 X 3.7 = 2.96 20 X 3.7 = 0.74
Light weight 70 X 14.8 = 10.36 10 X 14.8 = 1.48 20 X 14.8 = 2.96
Adjustable height 100 X 3.7 = 3.70
Airflow capacity 50 X 14.8 = 7.40 50 X 14.8 = 7.40
Quietness 40 X 18.5 = 7.40 60 X 18.5 = 11.10
Compact size 5 X 11.1 =0.56 5 X 11.1 =0.56 30 X 11.1 =3.33 30 X 11.1 =3.33 30 X 11.1 =3.33
Looks nice 50 X 7.4 = 3.70 50 X 7.4 = 3.70
Total contribution percentage 31.64% 13.88% 8.88% 16.65% 21.83% 7.03%
Components
Contribution weight assigned to the component * importance to the customer (exhibit 1)
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Achieving the Target Cost
Identify components for cost reduction Calculate a value index for each major component
(exhibit 6)
Component cost as a percentage of total cost divided by the component’s relative importance to the customer
Index greater than 1
Disproportionately high cost in relation to its importance
Implies cost reduction should be considered
Do not manage by the numbers alone
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Achieving the Target Cost
EXHIBIT 6CALCULATION OF VALUE INDICES FOR COMPONENTS
Percent of ContributionComponent Total Cost Percentage Value Action
(Exhibit 3) (Exhibit 5) Index ImpliedMotor 40% 31.64% 1.26 Reduce costTransmission 20% 13.88% 1.44 Reduce costSpeed control 15% 8.88% 1.69 Reduce costBody 10% 16.65% 0.60 ImproveBlade 5% 21.83% 0.23 Improveblade guard 10% 7.03% 1.42 Reduce cost
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Achieving the Target Cost
Generate cost reduction ideas
Eliminate over-engineering
Eliminate, replace, combine, rearrange
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 Cost
Test the ideas
Will they be effective?
Are they technologically feasible?
Is there a domino effect?
Construct a component interaction matrix (exhibit 7)
Do activities interact?
Estimate the achievable costs
Use activity-based costing, cost tables, etc.
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Achieving the Target Cost
EXHIBIT 7COMPONENT INTERACTION MATRIX
Speed BladeComponent Motor Transmission control Body Blade guard
Motor X XTransmission X XSpeed control XBody X X X XBlade XBlade guard X X
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Make the Decision
Achievetargetcost?
Closeenough?
Release designfor production
Abortproject
Repeatvalueengr.?
Value engineering
Yes
No
Yes
No
No
Yes
Begin
CASE STUDY: Tata Nano
To develop a product for people who want to move from 2 wheeler to 4 wheeler in affordable price.
Car to cost within a price range of Rs 1,00,000.
Car to be developed with low cost, safety, low on emissions and fuel efficient.
To be a truly people’s car.
Car to be developed on three main factors.
Cost
Safety
Regulatory requirement
Product development (Target costing)
Just one wind shield wiper
Just one wind shield wiper
Plastic panel designed to eliminate need of
screws
Plastic panel designed to eliminate need of
screws
Seats with integrated head rest
Seats with integrated head rest
Use of aluminum engines to reduce weight and cost.
Use of aluminum engines to reduce weight and cost.
No radio, No AC, No side mirrors
No radio, No AC, No side mirrors
Material Substitution (i.e. Engineering
Plastics)
Material Substitution (i.e. Engineering
Plastics)
Use of Plastic and adhesive rather than Welding and metal
body.
Use of Plastic and adhesive rather than Welding and metal
body.