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Target Costing

Target Costing

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Published by Zarana Shah

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Published by: Zarana Shah on Jan 27, 2013
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01/29/2013

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Target Costing

If you cannot find the time to do it right, how will you find the time to do it over?

1

General Concept

Target cost is the cost that can be incurred while still earning the desired profit

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: 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
3

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 4 .

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 5 . delivery process designed simultaneously  Ensures features customers demand.Target Costing Characteristics  Product. manufacturing process.

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 6 .

Cross-Functional Team  Marketing  Distribution    Design/engineering Manufacturing Purchasing      Service/support Cost accounting Finance Legal Including suppliers 7 .

concept development stages  Achieve the target cost  Value engineering.Target Costing Process  Two stage process  Establish the target cost   Market research Product planning. continuous improvement  Design stage  Continuous improvement in later stages 8 .

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 9 .

value of features added or deleted Consensus of focus group Price predicted to achieve a desired market share 10 .Establishing the Target Cost  Determine the selling price    Must be acceptable to the customer Must be able to withstand competition Techniques    Existing price +/.

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 11 .

Establishing the Target Cost Unit Selling Price Product Life Stage 12 .

straining supply of resources Unit Cost Unexpected events affect cost of resources Product Life Stage 13 .Establishing the Target Cost Gradual decline as volume increases Competitors enter market.

cost and profit are almost meaningless because they fluctuate  Life cycle totals are more meaningful Total expected revenue throughout product life .Establishing the Target Cost  Unit price.Total desired profit throughout product life Total target cost 14 .

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 15 .Achieving the Target Cost  Must include the features the customer wants while maintaining cost at or below target  Want to meet the customers needs.

unmet or exceeded?  What can we learn from our competitors’ products? 16 .Achieving the Target Cost  Rank customer requirements (exhibit 1)  What does the customer want?  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.

Achieving the Target Cost EXHIBIT 1 CUSTOMER REQUIREMENT RANKINGS Less Important 1 2 Ranking 3 3 1 4 1 4 5 3 2 More Important 4 5 4 Raw Score 4 3 1 4 1 4 5 3 2 27 % of Total Raw Score 1 14.7% 14.8% 18.4% 100% Us Competitor Both Competitive Comparison 2 3 4 Customer Requirement Multiple speeds Horizontal oscillation Vertical oscillation Light weight Adjustable height Airflow capacity Quietness Compact size Looks nice Total 5 17 .1% 7.5% 11.1% 3.8% 11.8% 3.7% 14.

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. 18 .

19 .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.

Achieving the Target Cost  Value chain decomposition  Cost reduction targets are divided among internal and external activities  Internal costs  Labor. selling and administrative costs.  External costs  Components and services acquired from suppliers. Often represent a large proportion of total cost 20  . etc. etc. overhead.

00 $ 2.25 0.50 $ 0.00 1.75 $ 24.00 1.50 2.00 1.00 0.00 0.Achieving the Target Cost EXHIBIT 2 COST GAP BREAKDOWN BY LIFE CYCLE AND VALUE CHAIN Value Chain External Costs Target Current Gap $ 13.50 0.50 Life Cycle Research and development Manufacturing Marketing and distribution Service and support General administration Total Internal Costs Target Current Gap $ 0.50 $ 20.50 21 .00 0.00 5.25 0.50 $ 15.00 0.00 4.00 $ 2.70 $ 17.00 7.00 0.00 $ 4.50 0.20 20.00 3.25 1.00 5.20 Target $ 0.25 0.25 $ 29.50 0.20 4.00 6.80 $ 9.25 $ 6.00 0.30 17.30 $ 0.75 1.30 Total Costs Current Gap $ 0.00 $ 2.50 $ 0.

etc. labor. overhead.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. 22 .

Achieving the Target Cost EXHIBIT 3 COMPONENT COST BREAKDOWN Percent of total cost 40% 20% 15% 10% 5% 10% 100% Component Motor Transmission Speed control/switch Body Blade Blade guard Total Function Turns blade Provides oscillation capabilities Controls blade speed Houses motor. speed control Moves air Protects blade from contacting objects $ Cost 8 4 3 2 1 2 20 $ 23 . transmission.

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 24 .

Achieving the Target Cost EXHIBIT 4 QUALITY-FUNCTION-DEPLOYMENT (QFD) MATRIX Components Speed control Body Customer Requirements Motor Multiple speeds Horizontal oscillation Vertical oscillation Light weight Adjustable height Airflow capacity Quietness Compact size Looks nice Strong correlation Moderate correlation Weak correlation Transmission Blade Blade guard 25 .

1 =3.96 10 X 14.92 Transmission 80 X 11.22 20 X 3.5 = 11.1 =3.Achieving the Target Cost EXHIBIT 5 COMPONENT CONTRIBUTION TO CUSTOMER REQUIREMENTS Components Customer Requirements Multiple speeds Horizontal oscillation Vertical oscillation Light weight Adjustable height Airflow capacity Quietness Compact size Looks nice Total contribution percentage Motor 40 X 14.8 = 10.88 Body 20 X 11.8 = 8.1 = 2.5 = 7.03% 31.33 Blade Blade guard 70 X 14.8 = 7.1 =0.4 = 3.8 = 2.40 60 X 18.1 =3.88 80 X 3.70 7.64% 13.74 20 X 14.33 50 X 7.33 50 X 7.70 8.88% 21.7 = 3.4 = 3.36 50 X 14.40 5 X 11.8 = 5.8 = 1.7 = 0.48 Speed control 60 X 14.88% 16.65% 30 X 11.56 5 X 11.1 = 8.70 50 X 14.8 = 7.1 =0.40 40 X 18.96 100 X 3.7 = 2.56 30 X 11.83% Contribution weight assigned to the component * importance to the customer (exhibit 1) 26 .10 30 X 11.

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 27 .

26 1.44 1.23 1.83% 7.88% 16.65% 21.88% 8.69 0.42 Action Implied Reduce cost Reduce cost Reduce cost Improve Improve Reduce cost 28 .Achieving the Target Cost EXHIBIT 6 CALCULATION OF VALUE INDICES FOR COMPONENTS Percent of Total Cost (Exhibit 3) 40% 20% 15% 10% 5% 10% Contribution Percentage (Exhibit 5) 31.64% 13.60 0.03% Component Motor Transmission Speed control Body Blade blade guard Value Index 1.

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.Achieving the Target Cost  Generate cost reduction ideas   Eliminate over-engineering Eliminate. 29 . replace.

cost tables. 30 .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. etc.

Achieving the Target Cost EXHIBIT 7 COMPONENT INTERACTION MATRIX Speed control Blade guard Component Motor Transmission Speed control Body Blade Blade guard Motor X X Transmission X Body X X X Blade X X X X X X 31 .

Make the Decision Begin Value engineering Yes Repeat value engr.? No Abort project No Close enough? No Achieve target cost? Yes Yes Release design for production 32 .

Organizational Impact  Positives    Negatives  Customer focus Cross-functional integration Too much customer focus Potential organizational conflict Too much pressure to attain targets Longer development times   Open sharing of information Better process understanding    33 .

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