TARGET COSTING AND PRODUCT LIFE CYCLE

MADE BY:
‡ ‡ ‡ ‡ AKASH PRATAP AKSHI BHAGIA AMANPREET SINGH ANSHUL CHHABRA

PRICING DECISIONS DEPEND ON
‡ CUSTOMERS

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COMPETITORS

‡

COSTS

METHODS OF COST CONTROL
‡ TARGET COSTING

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PRODUCT LIFE CYCLE COSTING

TARGET COSTING DEFINITION Structured approach for determining the cost at which a proposed product of specified functionality and quality must be produced to achieve a desired level of profitability at its anticipated selling price .

value engineering. ‡ Widely practiced in Japan now .ORIGIN OF TARGET COSTING ‡ Emerged in japan in 1960¶s as a consequence of difficult market conditions. value analysis. ‡ Specialized tools including functional analysis. and concurrent engineering were introduced to support target costing.

OBJECTIVES OF TARGET COSTING ‡ Lower the cost to ensure profit levels ‡ Meet the level of quality. delivery timing and price required by the market ‡ Motivate all employees to meet target costs of new product and make target cost company-wide profit-management activity .

TRADITIONAL COSTING .

TARGET COSTING BASICS: ‡ MARKET-DRIVEN PRICING ‡ TREAT COST AS INDEPENDENT VARIABLE IN PRODUCT REQIREMENTS ‡ PROACTIVELY WORK TO ACHIEVE TARGET COST DURING PRODUCT AND PROCESS DEVELOPMENT .

Study market 2. Balance the target costs with requirements . Determine target costs 4. Set target price 3.STEPS OF TARGET COSTING 1.

VALUE ENGINEERING ‡ Examination of factors affecting the cost of the product and devising a means to achieve its specific purpose at the required standards of quality and reliability at acceptable costs ‡ Encompasses    improvement in product design changes in material specification modification in process methods .

MAIN FEATURES OF TARGET COSTING SYSTEM ‡ ‡ ‡ ‡ ‡ Integral part of design and introduction of new products Target price is determined using various sales forecasting techniques Establishment of target production volume Determination of cost reduction targets Series of intense activities to translate cost challenge to reality .

ADVANTAGES OF TARGET COSTING ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Reinforces top to bottom commitment to process and product innovation Market success Products better matched to customer needs Aligns cost of feature to customers willingness to pay for them Reduces development cycle Reduces cost of product significantly Increases team work among internal organizations Engages customers and suppliers in better product design and to more effectively integrate the entire supply chain .

PROBLEMS WITH TARGET COSTING ‡ Process can be lengthened to considerable extent ‡ Finger pointing in various parts of company ‡ More difficult to reach consensus .

IMPACT ON PROFITABILITY ‡ Emphasis on product cost throughout life cycle of product ‡ Precise targeting of correct prices .

Nissan.COMPANIES THAT USE TARGET COSTING ‡ General Electricals Motorola The US auto companies : General Motors. Mitsubishi NASA The US Military Sony ‡ ‡ ‡ ‡ ‡ ‡ . and (Daimler) Chrysler All Japanese auto companies including: Toyota. Ford. Honda.

structure or system ‡ Includes purchase price. operating costs. installation cost. maintenance and upgrade costs and remaining at the end of ownership . service.PRODUCT LIFE CYCLE DEFINITION ‡ Sum of all recurring and one-time (non-recurring) costs over the full life span or a specified period of a good.

distribution and customer service are locked in at the R&D and design stages. ‡ The development period for R&D and design is long and costly ‡ Many of the costs predicted to be incurred over several years in production.FEATURES OF LIFE CYCLE COSTING ‡ Includes Non-production Costs. . marketing.

until the product is no longer made .LIFE-CYCLE COSTING PROCEDURES ‡ Best form of costing from a planning standpoint ‡ Cannot be used for financial reporting ‡ Costs must be calculated from the point of the initial idea for the product.

PHASES IN PRODUCT LIFE-CYCLE: .

INTRODUCTION PHASE ‡ ‡ ‡ ‡ ‡ Product is put on the market and its awareness and acceptance are minimal. May last from few months to a year Retarding factors . sales revenue low and profits probably negative Sales of new products usually rise slowly at first. Promotional costs will be high.

consumer satisfaction must be ensured Factors for acceleration  larger pools of imitators  market is broadened by market segmentation.GROWTH PHASE ‡ ‡ ‡ ‡ Product penetrates into the market and sales increase Product begins to make profit contribution To sustain growth. product differentiation and higher levels of promotion  product improvements  number of distributors increase .

MATURITY PHASE ‡ ‡ ‡ ‡ Sales cease to rise exponentially Market saturation No new distribution channels to fill. Profits decline due to  competitive products.  innovators find market leadership under growing pressure.  Potential cost economies are used up  Prices begin to soften .

DECLINE PHASE ‡ Declining sales due to  product substitution  Fashion and changing tastes  Exogenous cost factors reducing profitability .

maturity. introduction. decline and deletion at varying speeds ‡ Product cost.CHARACTERISTICS OF PRODUCT LIFE CYCLE ‡ products have finite lives and pass through the cycle of development. revenue and profit patterns tend to follow predictable courses through the product life-cycle. ‡ Profit per unit varies as products move through their life-cycles. ‡ Each phase requires different strategic action . growth.

Customer Life-Cycle Costs ‡ Total costs incurred by a customer to acquire and use a product or service until it is replaced. ‡ For example. a car include the cost of the car itself plus the costs of operating and maintaining the car minus the disposal price of the car ‡ An important consideration in pricing decision of a product .

price variations and so on in isolation. for a particular product. product obsolescence. Management of environmental costs. Easy for management to recognize the profit implications of design changes. ‡ ‡ ‡ ‡ .BENEFITS OF PRODUCT LIFE-CYCLE COSTING ‡ Earlier actions to generate revenue or to lower costs than otherwise might be considered More accurate and realistic assessment of revenues and costs Considers total incremental costs over the entire life span of a product.

East.East Asia and African countries . yds. Universities to Industries both in the domestic and international markets ‡ Numerous Export Excellence Awards.ORIENTAL SCIENCE APPARATUS WORKSHOP ‡ Established in 1919 ‡ Spread over an area of 6000 sq. South. Middle. ‡ Serves laboratory needs ranging from Schools. Colleges. ‡ Prestigious place in the USA. Europe.

Advertisements.Direct material.COSTS ASSOCIATED WITH THE PRODUCT ‡ Direct cost.Paintin . Plating.Senior Management people's salaries. direct labor.Vehicles running maintenance .depreciation of plant and machinery /vehicles /buildings /computers/furniture . Wooden box ‡ Indirect costs. Administrative costs. Electricity and generator. Telephones. Packaging . Direct Supervisory costs .Traveling/Marketing /Entertainment. Bank Interest . Delhi office.

. Look for possibility of reduction in cost by optimizing the quantity. ‡ ‡ Make or buy decision. or first drilling a hole and then boring the hole in a work piece when you could get a drill of the final size straightaway. Costing done as per conventional methods.Sometimes it is cheaper to buy out the complete item or subassembly from smaller units or units which have an expertise in a particular line. Work-study  possible reduction/removal of avoidable processes during the manufacture  e g it is of no use to polish a surface and then roughen it.METHODS OF TARGET COSTING IN OSAW ‡ ‡ ‡ First the target price is ascertained.

pricing . Ministry of Defence and it was also exhibited in various exhibitions at Pragati Maiden /Medical colleges.BSF . AIIMS DELHI . Initially ‡ ‡ ‡ ‡ The price was high People were not familiar about the applications People did not know where to buy it from People were sceptical about it's working As the product was sold to some premier institutes like PGIMER Chandigarh . Police and medical colleges It is a device to magnify the image/printed matter in a magazine. working .INTRODUCTION OSAW made the Epidiascope in 1959 for the armed forces. people became aware of the product features.

‡ A stage came when each and every dept of PGIMER Chandigarh had an epidiascope( about 54 pieces) . ‡ Many other college profs who came to PGI introduced it to their college and each college bought 2-3 units. This was the growing stage .GROWTH ‡ People applied for finance and the sales grew. Production was not keeping pace with the growing demand.

MATURITY ‡ Who had already bought it did not need it again.the sales started being in a straight line i e mature stage. ‡ Other manufacturers started making the same item. the sales were more or less constant .So ‡ After 1973 .Till 1985. ‡ The sales had increased from just 10-20 units in 1959 to about 1000 units in 1973.

. They were handier and could record moving objects and up to 180 minutes ‡ The still photography was being replaced.DECLINE ‡ In 1985 advent of VCR and video camera. ‡ The sales of epidiascope started going down and by 1988 the sales were reduced to merely 20% of the peak i e 200 units a year.

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