target

costing

Definition

tc is defined as a cost management tool for reducing
the overall cost of product over its entire life cycle with the help of the production, engineering, R& D……

intent of target costing

reduction in cost planning & designing high quality products meeting customers needs using value engineering to target cost attain target cost using standard cost Keeping track of external market forces tc which can enable attain desirable market share team of engineers, designers, marketing, costing…

nature of target costing

Design
Type of Product Technical Specification Technical Requirements Customers Needs
Resource Consumption (Acq Price)

Cost

Market Price

target costing methodology
Manage Upstream During product Planning & designing
Provide frame work of strategic targets to guide managing down stream

R&D

Design

Manufacturing

Marketing & Distribution

Customer Service

Upstream Activities (before Manufacturing)

Downstream Activities ( After Manufacturing)

target costing methodology
Manage Upstream During product Planning & designing
Provide frame work of strategic targets to guide managing down stream

Concurrent Engineering Analysis of market forces Customers Needs Relevant Technology Competitors Models Product Configurations & Performance features Design alternatives Process capabilities Maintenance & Service Requirements Life cycle costs

Target Costing
Price led costing Life-cycle costs Focus on process design Cross-functional teams

Key principles of target costing
Focus on the customer

Value-chain orientation Focus on product design

Target Costing Analysis reveal innovative possibilities in several in several areas especially for

Reducing
Cycle time for design Cycle time for development Cycle time for manufacturing & service Costs for design, development Costs for manufacturing & service Number of total Parts per model Rate of redesign, rework and repair

End result is a Product Design Which can Face Competition Guarantee target Profit Target Cost against

Target Costing

Business Plan

Product Market Strategies

Steps in target costing--summary

Customer Needs

Product Performance Features

Value added By each Feature & Component

Choose Suppliers assuring Target cost

Choose Manufacturing Design assuring target costs

Choose a product Design With assured target profit Cost target for each component

Cost Review

Conduct VE to Reduce Target Costs

Monitor Product performance Cost & Profit Target Price

target costing Methodology
1Customer Requirements & Gathering Market Information

Product features Product pricing Product Quality Product Availability Product performance Product delivery Product Service

target costing Methodology
2 Documenting Customer Requirements
Product Characteristics Competitor Performance Comparisons Target Performance Values Customer Rating Comparisons Data from Customer Surveys Experience with Previous Products Market Research Studies Engineering Studies Calculations & Modellng Experimentation

target costing Methodology
3 Comparing Competitors Products Global Market Leader Upcoming

Product

Price & Performance Parameters similar for New Product Planned

target costing Methodology
3 Comparing Competitors Products

Price & Performance Parameters similar for New Product Planned
Data used For Decision be Based On

Customer Input Comparative Test Data Published Performance Specifications Annual Reports Trade shows Other external Sources

target costing Methodology
3 Comparing Competitors Products

Competitor Information

Annual Reports Marketing Brochures Commercial Data base Newspapers Magazines Other Publications

4 performance Testing

Several Samples of Each product for Performance Testing & Reverse Engineering

5 Applying
Reverse Engineering
Reverse engineering can be viewed as the process of analyzing a system to:

Identify the system's components and their interrelationships Create representations of the system in another form or a higher level of abstraction Create the physical representation of that system

Team having experts from
Manufacturing, designing, industrial Engineering ,procurement, Estimating

5 Applying
Reverse Engineering

RE consist of estimating the following

The type of Manufacturing Processes used for each component

The time required to Manufacture each component

The manufacturing Philosophy Of each competitor

6 Cost Structure
Analysis

Internal cost of existing products Competitors cost of similar products Categorizing according to cost drivers Comparative Ratios Projected costs Best practices

7 Value Engineering

Current cost of Product Various features of Product Improvement required Value given by each function What modification Cost reduction Product improvement

Value Engineering and Target Costing
Target cost information  Product design  Product costs  Production processes Value Engineering  Cost reduction  Design improvement  Process improvement

target costing-Methods

1 Subtraction Method 2 Addition Method 3 Integrated Method

target costing-Methods 1 Subtraction Method

Based on competitors’ price, where the target cost is worked backwards from the market price. The Target result may represent a very rigorous target and may be difficult to achieve

target costing-Methods 2 Addition Method

Based on the existing technology and past cost data of the company. It is achievable but ignores Market Conditions.

target costing-Methods 3 Integrated Method

Integration of Subtraction & Addition Methods

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