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Target Costing

Presented by : Group 8

Manisha Chakravarty 47

Kapil Ahuja 51

Praggya 89

Sandeep Indukuri 103

Priodeep Dutta 123

Evenpreet Singh 131

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General Concept

Target Costing is a disciplined process for

determining and realizing a total cost at which

a proposed product with specified

functionality must be produced to generatethe desired profitability at its anticipated

selling price in the future.

Selling price desired profit = target cost

The customer sets the price

Profit must be achieved through cost control

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Target Costing Characteristics

Contradicts the traditional approach: designproduct, 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? Find answers to these questions before

committing to the project

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Target 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

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

Customers cost of ownership

Emphasizes future sales instead of current cost savings

Service and repair

Disposal and recycling

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Target Costing Process

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Mapping the Product to the Market

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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?

Introduce concept or prototype

Evolutionary or revolutionary?

Refine until it meets customer needs

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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 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 theproduct

Price and costs fluctuate

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Establishing the Target Cost

Product Life Stage

UnitC

os

t

Gradual decline as volumeincreases

Competitors enter market,

straining supply of resources

Unexpected events affectcost of resources

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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

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

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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Make the Decision

Achieve

target

cost?

Close

enough?

Release design

for production

Abort

project

Repeat

value

engr.?

Value engineering

Yes

No

Yes

No

No

Yes

Begin

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Organizational Impact

Positives

Customer focus

Cross-functional

integration

Open sharing of

information

Better processunderstanding

Negatives

Too much customer

focus

Potential organizationalconflict

Too much pressure to

attain targets

Longer development

times