Target Costing

Presented By : Rahul Pandey (1033)

Reshu Varshney (1034)

Taking a product’s market price as given and determining the maximum cost the company can spend to make the product and still achieve the desired profitability.

Target Costing

Price (set by market)

Gross margin (set by management)

Target ProductCost(Price-Gross Margin)

Part A

Part B

Part C

Direct labor

Indirect cost1

Indirect cost 2

Indirect cost 3

Indirect cost 4

Existing Cost Structure

Part A

Part C

Direct Labor

Indirect Cost 2

Indirect Cost 3

Indirect Cost 4

Target Cost Structure

Target Cost Analysis

TECHNIQUES OF COST REDUCTION

Value engineering (during design and development)

Kaizen costing (during production)

Activity-Based Management (during all stages of product life)

TARGET COSTING

VSCOST-PLUS

PRICING

EXAMPLE

ITT Automotive receives invitation from ford to bid on the ABS to be used in a new model car

Estimated current manufacturing cost = $154

Gross margin rate = 30% on sales Highly competitive market Sale price = $200 per unit

COST-PLUS PRICING

Let x be the price 70% of price = actual cost 70x/100 = 154 X = $220 Rejection of bid

TARGET COSTING

As 70% of price = actual cost Sale price = $200 Target cost = 70% of 200 = $140 Required cost reduction = $154-$140 =

$14 If commitment for cost reduction,

company can bid at $200