Target CostingTarget Costing

Maria OsipovaMaria OsipovaInna DueckInna Dueck

Tatiana VolinaTatiana VolinaIvan KraynevIvan Kraynev

Vladimir AlferovVladimir Alferov

HistoryHistory Target costingTarget costing was invented by Toyota was invented by Toyota in 1965in 1965Reasons:Reasons: 80-90% of the life cycle cost is 80-90% of the life cycle cost is determined at the design phase of the determined at the design phase of the product product (Tanaka) (Tanaka) continuous improvement, “cost continuous improvement, “cost kaizen”, inevitably lead to fewer kaizen”, inevitably lead to fewer opportunities to cut costs opportunities to cut costs (Tanaka) (Tanaka) SOLUTION: SOLUTION: actual costs actual costs -> -> ppredetermined costsredetermined costs

DefinitionDefinition

Target Costing Target Costing is defined asis defined as a cost management tool for reducing the overall cost of a product over its entire life-cycle with the help of production, engineering, research and design.

TARGET-COSTING TARGET-COSTING PRINCIPLESPRINCIPLES

1.1. price-led costing. price-led costing.

2.2. focus on customers. focus on customers.

3.3. focus on design. focus on design.

4.4. cross-functional involvement. cross-functional involvement.

5.5. value-chain involvement. value-chain involvement.

6.6. a life-cycle orientationa life-cycle orientation....

Target costing objectivesTarget costing objectives

To identify the cost at which the To identify the cost at which the product must be manufactured if it's product must be manufactured if it's to earn its target profit margin at its to earn its target profit margin at its expected or target selling price. expected or target selling price.

To decompose the production To decompose the production process and then process and then to set cost targets to set cost targets for each product elementfor each product element..

Approaches to target Approaches to target costingcosting

Price-based targetingPrice-based targeting Cost-based targetingCost-based targeting Value-based targetingValue-based targeting

A target cost is the maximum amount of A target cost is the maximum amount of cost that can be incurred on a product. cost that can be incurred on a product.

Target Cost = Market Price – Expected Target Cost = Market Price – Expected MarginMargin

Price-based targetingPrice-based targeting

Sets target cost for the product Sets target cost for the product through comparison with that of through comparison with that of competitorscompetitors

This means setting the price of the This means setting the price of the product product by observing what the by observing what the market will bear, then deducting the market will bear, then deducting the desired profit margin from the price, desired profit margin from the price, and thereby obtaining the target cost. and thereby obtaining the target cost.

Cost-based targetingCost-based targeting

It sets the cost 1st, then the desired It sets the cost 1st, then the desired profit margin profit margin isis derive derivedd at the price at the price of the product. of the product.

This metThis method requires the suppliers hod requires the suppliers to reveal the very details of their to reveal the very details of their cost structurecost structure and and will sour the will sour the buyer-supplier relationships buyer-supplier relationships so itsso itsnn’’t t good for the long rungood for the long run..

Value-based targetingValue-based targeting

It It sets the price by what it thinks the sets the price by what it thinks the market will ‘value’ the product market will ‘value’ the product

After that, the producer sets the After that, the producer sets the desired profit margin and then tries desired profit margin and then tries all ways to keep the cost below that all ways to keep the cost below that of the target cost. of the target cost.

BenefitsBenefits

Delivering the optimal value Delivering the optimal value proposition to end customers. proposition to end customers.

Minimizing product-line complexity. Minimizing product-line complexity. Selecting appropriate product and Selecting appropriate product and

process technologies. process technologies. Lowering Lowering product product design late in the design late in the

innovation process. innovation process. Eliminating cost overruns. Eliminating cost overruns.

Negative pointsNegative points

possible misuse of the technique. possible misuse of the technique.

Producers might make use of cost-based target Producers might make use of cost-based target costing to squeeze the profit margins of costing to squeeze the profit margins of suppliers, thereby getting materials at the suppliers, thereby getting materials at the lowest cost possible. lowest cost possible.

the stress on the design team of companies the stress on the design team of companies using target costing using target costing

disadvantage to the company. disadvantage to the company.

Product development time might be lengthen as Product development time might be lengthen as product is repeatedly designed to bring cost product is repeatedly designed to bring cost below that of target. below that of target.

Three main elements of the target Three main elements of the target costing process costing process by by Cooper & Cooper & SlagmulderSlagmulder

ImplementationImplementation

1.1. Price-led costing ~ market prices Price-led costing ~ market prices are used to determine target costsare used to determine target costs

2.2. Focus on customers ~ value to the Focus on customers ~ value to the customer must be greater than the customer must be greater than the cost of the product itselfcost of the product itself

3.3. Focus on design ~ cost control must Focus on design ~ cost control must occur before production occur before production

4.4. Cross-functional involvement ~ Cross-functional involvement ~ interfunctional product and process interfunctional product and process teams teams

5.5. Value-chain involvement ~ all Value-chain involvement ~ all members of the value chain includedmembers of the value chain included

6.6. Life-cycle orientation ~ minimizing Life-cycle orientation ~ minimizing total life-cycle coststotal life-cycle costs

Control PointsControl Points

Top management Top management in case of establishing in case of establishing a new producta new product

Cost estimating group Cost estimating group decomposing the decomposing the preset valuepreset value

Cross-functional target costing teams Cross-functional target costing teams analysing the production processanalysing the production process

SSimilar approach to the imilar approach to the target costingtarget costing by by

CaterpillarCaterpillar The main aim: to reduce costs by The main aim: to reduce costs by

5.4%5.4%

The cost of the comparable model is The cost of the comparable model is based on current manufacturing based on current manufacturing capabilitiescapabilities

SSimilar approach to the imilar approach to the target costingtarget costing by by

CaterpillarCaterpillar cross-functional organizational cross-functional organizational teamteam emphasize cost reduction during the emphasize cost reduction during the

new product development cyclenew product development cycle rereduceduce costs throug costs throughh efficiency efficiency

improvementsimprovements

CaterpillarCaterpillar

SSimilar approach to the imilar approach to the target costingtarget costing by by

CaterpillarCaterpillarA few areas of reductionA few areas of reduction:: AssemblyAssembly CabCab EngineEngine HydraulicsHydraulics Power TrainPower Train StructuresStructures LinkageLinkage OtherOther

Target costing Target costing prospectivesprospectives

Target costing which has been Target costing which has been widely used by Japanese firms since widely used by Japanese firms since 1970s now is spread all over the 1970s now is spread all over the worldworld

Main industries: Main industries: transportation and transportation and heavy equipment industriesheavy equipment industries ((Intensive competition, extensive Intensive competition, extensive supply chains, and relatively long supply chains, and relatively long product development cyclesproduct development cycles))

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