Definition and Meaning

of
Target Costing

Amit Sheth
Anand Dube
Dhruv Joshi
Samir Daddikar
Swapnil Mehta
 Companies following Target Costing

COMPAQ DAIMLER
CHRYSLER NEC

ISUZU
FORD TOYOTA MOTORS

 The target costing for a product is calculated by starting with the

product's anticipated selling price and then deducting the desired profit.

 Target Cost = Anticipated selling price – Desired profit

 Definition
“Target Costing is a disciplined process for
determining and achieving a full-stream cost
at which a proposed product with specified
functionality, performance, and quality must
be produced in order to generate the desired
profitability at the product’s anticipated selling
price over a specified period of time in the
future.”
 History
 Originated in Japan in 1960s.

 Value Engineering - Maximising profit and reducing

product costs

 Value Engineering in Japan – “Genka Kikaku”

 Development of Target Costing

 Burst of Japanese economic bubble in 1990-91.
 Severe appreciation of Yen against $.
 Long recession prevalent in Japan.
 History
 Implemented first by Toyota in 1965

 Reasons:
 80-90% of the life cycle cost is determined at the
design phase of the product (Tanaka)
 Continuous improvement, “cost kaizen”, inevitably
lead to fewer opportunities to cut costs (Tanaka)

 Solution:
 Actual costs --> predetermined costs
US v/s Japan Cost Mgmt.
 Traditional Costing v/s Target
Costing
Concept Traditional Costing  Target Costing 
Focus of the cost price Engineer driven cost plus Market driven price less profit
relationship mark-up = price approach = target cost approach. Focus
Focus on the supply side first. on the demand side first.

Algebraic relationship Profit = Price - Cost Target Cost = Target Price -

between cost and price or  Target Profit
Price = Cost + Profit

Value chain and product Emphasis on production costs. Emphasis on the product life
life cycle emphasis cycle costs over the entire
value chain. Includes the
customer's costs.

Cost reduction emphasis Production stage. Emphasis on Design stage, e.g., emphasis
budgeted costs.  on designing products with
fewer parts and common
parts.
 Target Cost Concept
Product Requirements & Market Analysis

Target Priceless Profit

Balance Target Cost & Requirements

Make/Buy Analysis Explore Product & Cost Projections

Process Design
Alternatives & Design
Supplier Target Costing Product & Process Value Analysis

Production

Continuous Cost Reduction

 Advantages of Target Costing
 Proactive approach to cost management.

 Orients organizations towards customers.

 Breaks down barriers between departments.

 Implementation enhances employee awareness and empowerment.

 Foster partnerships with suppliers.

 Minimize non value-added activities.

 Encourages selection of lowest cost value added activities.

 Reduced time to market.

Disadvantages of Target Costing
 Effective implementation and use requires the
development of detailed cost data.

 Its implementation requires willingness to co-

operate.

 Requires many meetings for co-ordination.

 May reduce the quality of products due to the use of

cheap components which may be of inferior quality.