Target And Lifecycle Costing

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ACKNOWLEDGMENT:We would like to express our greatest gratitude to the people who have helped & supported us throughout the project. We are grateful to our teacher Prof. Paarmjeet Kaur for her continuous support for the project, from initial advice & contacts in the early stages of conceptual inception & through ongoing advice & encouragement to this day. A special thank of mine goes to Company officials who helped us in completing the project & exchanged their interesting ideas, thoughts & made this project easy and accurate.

Regards Gursimran Singh Harsimran Singh Karan Sudhendran Karminder Kaur Rahul Sharma

Target & Life Cycle Costing

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Table of contents
Abstract.......................................................................................................... Error! Bookmark not defined. 1.Target Costing .......................................................................................................................................... 2 1.1Defination .......................................................................................................................................... 3 1.2History and evolution of target costing ............................................................................................ 6 1.3How target costing is processed .......................................................... Error! Bookmark not defined. 1.4Limitations............................................................................................ Error! Bookmark not defined. 1.5Target Costing:Innovative technique of cost accounting ............................................................... 8 2.Life Cycle Costing ...................................................................................... Error! Bookmark not defined. 2Introduction ............................................................................................ Error! Bookmark not defined. 2.1Definations ............................................................................................ Error! Bookmark not defined. 2.2Brief history of LCC analysis.............................................................. Error! Bookmark not defined. 2.3Why use LCC: .................................................................................................................................. 20 2.4Procedure: ........................................................................................................................................ 20 2.5Importance of LCC in this era ........................................................................................................ 20 2.6Limitations of LCC: ......................................................................................................................... 20 3.Analysis of Implementation of Target Costing at MILKFED ............... Error! Bookmark not defined.

4.Analysis of Implementation of Target and Life-cycle costing at Sarovar Hotels and Resorts.Error! Bookmark no 5.Analysis of Implementation of Target and Life-Cycle Costing at HMT.Error! Bookmark not defined. 6.Analysis of implementation of Life-cycle costing at Spice digital Ltd . Error! Bookmark not defined. 7.Analysis of Implementation of Target and Life-Cycle Costing at AVON cycles………………. 44 8. Analysis of Implementation of Target Costing at ………………. 44

8.References ................................................................................................... Error! Bookmark not defined.

Target & Life Cycle Costing

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Abstract
Traditional cost-based pricing which became the dominant approach to pricing during the period when products were long-lived and there was relatively little competition. However, in today‘s competitive environment, cost-based prices may not be competitive, as worldwide competition places intense downward pressure on prices and removes slack from pricing formulas. Furthermore, due to these competitive pressures, the lifecycle of products and the time to bring new products to the market have reduced. Companies nowadays are indulging in two main aspects in order to control cost of their products so as to have a competitive edge in the market: Target Costing and Product Life Cycle Costing. Target Costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum target cost. Lifecycle Costing analysis is done to quantify the total cost of ownership of a product or a project throughout its full lifecycle, which includes research and development, construction, operation and maintenance, and disposal. Life Cycle Costing is a concept used for making decisions between alternative options, optimizing design, scheduling maintenance and revamping project planning. We divided ourselves into two teams. One team took care of Lifecycle Costing analysis and the second team was analyzing Target Costing. The Target costing team selected the following companies for their analysis:1) Verka milk plant 2) Sarovar Hotels and Resorts 3) Hindustan Machine Tools The Lifecycle costing team selected the following companies for their analysis:1) Spice Digital Limited 2) AVON CYCLE Questions pertaining to the concept, evolution, reasons and methods for implementation, advantages and disadvantages were asked from the above companies. Most of the companies were also willing to share data with the team members which added clarity to the subject.
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quality. Ford. Daihatsu Motors. but rather a management technique aimed at reducing a product‘s life-cycle costs. managers can determine how they should alter product designs before they enter the manufacturing process in order to ensure that the company earns a reasonable profit on all new products. or delivery reliability. to generate a desired level of profitability at its anticipated selling price‘. use target costing including Compaq. In price-based target costing. It is an important part of a comprehensive management process aimed at helping an organization to survive in an increasingly competitive environment. the target costing technique is more useful to those manufacturers who mass produce a make-to-stock item in a competitive market in which customers are most sensitive to price and cost levels. DaimlerChrysler. (1) Target Costing 1. Toyota etc. They gather data on the market price and subtract their desired profit margin. While it may be important as a tool to those competing on delivery speed. When the product being developed does not meet the target cost and profit.Based on their responses our team was able to complete successful analysis of both Target and Lifecycle Costing.1 Definition: Target Costing can be defined as ‗a structured approach to determining the cost at which a proposed product with specified functionality and quality must be produced. By describing costs in a proactive and future-oriented manner. Isuzu Motors. NEC. a company sets a target cost through comparison of competitive products. often it is not commercialized. Cummins Engine. Rather it is much more than a management accounting technique. A number of companies. This desired profit margin will almost always greater than the cost of capital but is influenced by macro environmental forces as well as shareholder goals. primarily in Japan. Target Cost = Anticipated Selling Price – Desired Profit Target & Life Cycle Costing Page 5 . Target Costing for a product is calculated by starting with the product‘s anticipated selling price and then deducting the desired profit. The term ―Target Costing‖ is a misnomer: it is not a product costing system. ITT. product flexibility. Basically Target Costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum target cost figure.

1. Yet a full-fledged target costing approach began during the period of scarce resources after World War II. Target costing thus emerged from this environment. Americans created a concept of maximizing desirable product attributes while at the same time minimizing product costs . A range of specialized tools. The first use of value engineering in Japan—known as ―genka kikaku‖—occurred at Toyota in 1963. in order to meet the price goal of DM 990. and aimed at enhancing the degree of integration between the upstream and downstream activities of a firm‘s operations. finance and production into expert teams. A proliferation of consumer and industrial product of western firms were overcrowding the markets in Asia. Also. engineering. These terms were able to examine new methods and techniques for the design and development of new products. During this time. They believed that there were advantages in combining employees from strategy. as used by Western firms for manufacturing and achieving effective results. planning. tools and techniques. Rösler (1996) did etymological research to clarify the derivation of the term ―target costing‖ from Japanese language. can be found as early as the beginning of the last century at Ford in the United States and in the development of the Volkswagen Beetle in Germany in the 1930s. Target Costing emerged in Japan in 1960s as a response to difficult market conditions. where they were able to identify all relevant elements to formulate a holistic management approach. alternative technical solutions were weighed on the basis of cost considerations . marketing. At Volkswagen. value engineering. which were required to achieve parity with the toughest western competitor in terms of quality. in order to achieve performance levels to meet the firm‘s objectives. The technique became known as ―value engineering‖ and was subsequently adopted by Japanese companies in order to withstand stiff competition within Japan. Many Japanese companies considered modified cross-functional activities.‖ the term now used throughout the world. In the 1960s. Later ―genka kikaku‖ was translated into ―target costing.2 History and Evolution of Target Costing: A retrograde approach for determining product costs. cost and productivity. including functional analysis. value engineering was combined with the idea of influencing and reducing product costs as early as possible during the planning and development stages of a product. value analysis and concurrent engineering were introduced to support target costing. which is one of the most important features of target costing. which he described as Target & Life Cycle Costing Page 6 . Japanese companies were experiencing shortages of resources and skills needed for the development of new concepts. This made Japanese companies particularly effective in the areas of product design and development.

As competition grew fiercer and profits weakened. In the early of 1990s. the approach slowly evolved into a far more powerful system (Buggert and Wielpütz. Existing target costing practices made it difficult to eliminate extra cost. More integrated. In other cases. 1995).‖ the term has been generally accepted in the Western world. However. as different autonomous activities were being integrated into target costing. the use of target costing intensified and companies developed better methodologies. companywide efforts to reduce costs resulted. the official name was made ―target cost management‖ on the grounds that ―target costing‖ was too vague and did not convey the true meaning of ―genka kikaku. so it never extended into other areas of the company. It was also common to implement only some components of target costing rather than a fully integrated system. many companies in Japan were using target costing effectively. three major events occurred in Japan that contributed to significant changes in target costing. in an effort to survive. Until the early 1990s. though their applications of it were limited to relatively few products and parts. At the annual meeting of the Japan Cost Society in 1995. Target & Life Cycle Costing Page 7 .原 價 企 劃 Gen ka Ki kaku Origin Price Cost Plan Target Costing Even though Kato (1993) criticizes the use of ―target costing‖ as a translation of ―genka kikaku. target costing was initiated by purchasing departments as a tool to manage suppliers. which caused many companies to struggle to meet customers‘ expectations of lower prices. The first and most significant event was the bursting of the economic bubble in 1990 and 1991. At the same time. with efforts focused mainly on expanding the existing target costing systems. Target costing was also largely dependent on experience and intuition rather than on scientific and objective information. its application has evolved rather slowly as many companies responded to changes in the external environment. the strategic focus of major Japanese companies shifted from increasing market share to earning profit.‖ Even though the basic concept of target costing has been in existence in Japan for more than 40 years.

Clearly. dollar. 1994). target costing has evolved from a relatively simple instrument for controlling the cost of purchases to a comprehensive profit management instrument (Hasegawa. It moved from a stabilized exchange rate of 130–140 yen per dollar in 1992 up to a record 84 yen per dollar. As a result. This time the improvement focused largely on information processing and information technology support. the Japanese yen had appreciated as much as 50 percent against the dollar. market and profitability considerations. The target profit margin is derived from the company‘s long-term business Target & Life Cycle Costing Page 8 .S. 7 •Continous Cost Reduction The first part of the process is driven by customer. The long recession in Japan caused by a crisis in the financial sector was the third major event that forced many Japanese companies to squeeze out costs to meet their profitability requirements. By 1995. 1. To survive.3 How Target Costing is processed: The process of target costing involves following set of activities •Market Research:Determine Customer wants and Price Sensitivity 1 2 •Planned Selling Price is set 3 •Target Cost is determined as:Selling Price-Desired Profits 4 •Teams of Employees from Various Areas and Trusted Vendors Simultaneously •Design Product Determine Manufacturing Process Determine necessary Raw Materials 5 6 •Manufacturing: Once target Cost is achieved the manufacturing begins. Its goal is now generally understood to be to minimize life-cycle costs so that long-term profit is maximized.The second event was the rise of the Japanese yen against the U. Japanese companies intensified their use of target costing. both exports and the profit margins of Japanese companies plummeted. Given the profitability is critical for survival. a target profit margin is established for all new product offerings. which started in 1993.

while the latter acknowledges current inherent limitations. especially with respect to capacity related costs (such as tooling costs). the difference between these two figures indicates the allowable cost for the product. As the ideal is to produce at the allowable cost. while setting the target selling price. Typically. in many cases the target cost agreed upon will exceed the allowable cost. it generally cannot be changed. are clearly recognized. and the challenge or those involved is to meet this target. but Target & Life Cycle Costing Page 9 . but encompasses the functionalities and quality requirements of the new product. These activities continue throughout the design stage up until the point when the new product goes into production. Once the product-level target cost is set. This amount may be divided into a target cost-reduction objective and a strategic cost-reduction challenge. however. Ideally. These specifications are based on customer requirements and expectations and are often influenced by the offerings of competitors. a target selling price is determined using various sales forecasting techniques. The current cost is based on existing technologies and components. as product costs are dependent upon the production levels over the life cycle of the production. Importantly. Having achieved consensus about the product-level target cost. Critical to setting the target selling price are the design specifications (reflecting certain levels of functionality and quality) of the new product. The former is viewed as being achievable (yet still a very challenging target). However. a series of intense activities commence to translate the cost challenge into reality. The next stage of the target costing process is to determine cost reduction targets. competitive conditions and customers‘ demands for increased functionality and higher quality. which incorporates its long-term strategic intent and profit margins. Some firms will do this by estimating the ―current cost‖ of the new product. the target selling price is market-driven and should encompass a realistic reflection of the competitive environment. Hence. Integral to setting the Target selling price is the establishment of target production volumes. The difference between the current cost and the target cost indicates the required cost reduction that is needed. Once the target selling price and required profit margin have been determined. it is important that the difference is not too great. as charging a price premium may not be sustainable. given the relationship between price and volume. Then for any given product. given the realities with existing capacities and capabilities.plan. The expected targets volumes are also critical to computing unit costs. a product-level target cost is set which is the difference between the current cost and the target cost-reduction objective. Value engineering involves searching for opportunities to modify the design of each component or part of a product to reduce cost. each component is studied and opportunities for cost reductions are identified. Each product or product line is required to earn at least the target profit margin. These activities are often refer to as value engineering (VE) and value analysis (VA). without significant increases in price. It should be noted that a fair degree of judgment is needed where the allowable cost and the target cost differ. the total target is broken down into its various components. the allowable cost becomes the target cost for the product. After analyzing the cost reduction objective.

This is a major problem when there are particularly stubborn people on the design team who are holding out for specific product features. known as Kaizen costing. but without reducing the functionality or quality of the product. as well as a long-term Target & Life Cycle Costing Page 10 . 1. Where components are sourced from suppliers (which is often the case in the automotive industry). if there is no evidence of rapid progress toward a specific target cost within a relatively short period of time. it is better to either ditch a project or at least shelve it for a short time and then try again. the total cost will meet the target. Difficulty in reaching a consensus: Having representatives from number of departments on the design team can sometimes make it more difficult to reach a consensus on the proper design because there are too many opinions regarding design issues. especially if employees in one area feel they are being called on to provide a disproportionately large part of the savings. on the assume that new cost reduction methods or less expensive materials will be available in the near future that will make the target cost an achievable one. 3. This occurrence is most common when the project manager is unwilling to ―pull the plug‖ on a design project that cannot meet its costing goals within a reasonable time frame. Value analysis entails studying the activities that are involved in producing the product to detect non-value-adding activities that may be eliminated or minimized to save costs. Finger Pointing: Another problem with target costing is that a large amount of mandatory cost cutting can result in finger-pointing in various parts of the company. Lengthening of Development Process: The development process can be lengthened to a considerable extent since the design team may require a number of design iterations before it can devise a sufficiently low-cost product that meets the target cost and margin criteria. These include: 1. Resolving out is difficult and requires a strong team manager. Overall. There is also an ongoing continuous improvement program.without reducing functionality or quality of the product. target prices are established for each part and the company‘s employees work with the suppliers to ensure that the targets are achieved. the industrial engineering staff will not be happy if it is required to completely alter the production layout in order to generate cost savings. the aim of the process is to ensure that when production commences. For example. Usually. thereby further lowering costs below the initial targets specified during the design phase. 2. Avoiding this problem requires strong interpersonal and negotiation skills on the part of the project manager. that focuses on the reduction of waste in the production process. and profit goals will be achieved.4 Limitations: Target Costing has a number of limitations and implementation challenges. while the purchase staff is not required to make any cost reductions through supplier negotiations.

This detail requires the hands-on involvement of manufacturing. The term too is seen as limited to the accounting domain and traditionally accountants have not been used to implement production changes. particularly when the culture has previously embraced a cost-plus approach to pricing. parts that would meet engineering specifications with one weld instead of three. even though they have access to the cost data. For example an automobile manufacturer must chart the entire production process and go through a product's complete. To implement market-driven management across the organization. There has been a shift toward unstable. expectations and standards are communicated and understood.5 Target costing: Innovative technique of cost accounting In today‘s rapidly changing business environment. but these communications are often lost when the function is transferred to one of the partners in the chain. Minor changes. are the goal. the importance of trust and cooperation is crucial. 1. product innovation is one of the keys to a company‘s survival and competitiveness. Manufacturers can no longer produce and market large volumes of standard products with a relatively stable market and technological climate. 5. the implications in practice are more difficult. The cost plus approach is often quicker and does not involve an iterative. not major innovations. When functions are performed at the manufacturer's plant. The cost-plus approach also does not have a strong market orientation that is a prerequisite for target costing. product engineering and marketing.commitment on the part of a company to weed out those who are not willing to act in the best interest of the team. While the concept of target costing is intuitively and seemingly simple. design engineering. Transferring previous in-house functions to partners or outsourcing can be a risk due to the inability to monitor or control the output of the desired function.and many other ways to save a processing step. lowest-level. inclusive approach to reducing the gap between current costs and target cost as in target costing. Lack of understanding or relevance: While target costing has a straight forward logic. Cross functional Barriers: When using target costing within the supply chain. the implementation and execution is very difficult. 4. the design process must be broken down into its lowest level components.connections that can be made with two screws instead of four. parts that could be installed without painting them first . rapidly changing markets and technologies. measurement and cost control Target & Life Cycle Costing Page 11 . One way to control this problem is by the placement of one of the manufacturer's employees within the supplier's plant to monitor and aid the activities of the supplier. Production Detail: In target costing. bill of materials to uncover areas for improvement . 6.

cost. as worldwide competition places intense downward pressure on prices and removes slack from pricing formulas. Before the fact. cost-based prices may not be competitive. Target Costing has the following innovative applications: Interacts with external environment to respond to customer needs and competitive threats. the lifecycle of products and the time to bring new products to the market have reduced. as well as with cost reduction of existing products by eliminating waste. due to these competitive pressures. A well-designed target costing system incorporates all three elements of the strategic triangle: Innovation. However.    Target & Life Cycle Costing Page 12 . Industrial marketers play a major role in product innovation. Furthermore. Target costing is one of the strategic cost management approaches better suited to strengthen a company‘s competitiveness in meeting today‘s business challenges. Traditional cost-based pricing which became the dominant approach to pricing during the period when products were long-lived and there was relatively little competition. The strategies that determine the direction of product innovation have become crucial to corporate management.systems must be designed to motivate the desired consumer-oriented behavior. Continuous improvement of cost for both customers and producers over a product‘s life. quality. in today‘s competitive environment. Considers many complex relationships among functions and across the value chain. and cost accounting must support this role. by anticipating and designing costs out of a product before production. and time. Cost management methods must help with the production of new products that meet customer demands at the lowest cost.

Life Cycle Costing applies the generic logic of the replacement cost approach and extend this through dynamic consideration of the total assets related costs over the life span of the assets. hence the issue of circularity associated with the use of discounted future cash streams as a methodology to value sunk assets. The whole-life costs of a project are the costs of acquiring (including consultancy. the costs of operating and the costs of maintaining over a whole life of a project through to its disposal. they also include risk allowances as required. Life Cycle Costing is a process of economic analysis to assess the Life Cycle Cost of a product or a project over its life cycle or a portion thereof. and disposal. design and construction costs. Life Cycle Costing is a concept used for making decisions between alternative options. for example).(2) Life cycle costing The main economic principle for assessing the economic value of any assets is that their value to investors be equal to the net present value of the expected future cash flows generated by those assets. Target & Life Cycle Costing Page 13 . scheduling maintenance and revamping project planning. which is well suited to compare alternative designs with different cost expenditures over the project life. The practical difficulty in making this assessment for regulated monopoly businesses is that the future revenue derived from the assets is itself determined by the regulator. but all cost occurred over the anticipated life cycle must be considered). construction. optimising design. including the power industry. A main objective of LCC analysis is to quantify the total cost of ownership of a product or a project throughout its full life cycle. operation and maintenance. where relevant. The option identified with the lowest total present value is the most economical or least cost option/approach. These cost include internal resources and departmental overheads.which includes research and development. and equipment). flexibility (predicted alterations for known change in business requirements. LCC analysis is an economic evaluation technique. All relevant costs or whole-life costs (often referred to as through-life costs) should be converted to their equivalent present value (it is not only about the initial investment and acquisition costs. The value of a network is the sum of the depreciated replacement cost of the assets that would be used if the system were notionally reconfigured so as to minimise the forward looking costs of service delivery. This potential circularity could be eliminated by the use of a replacement cost approach. Life Cycle Cost (LCC) analysis and Total Cost of Ownership evaluations are the basis for decision making for the wide range of different industries. refurbishment costs and the cost relating to sustainability and health and safety aspects.

Cost driver LCC element which has a major impact on the LCC. assuming that the required external resources are provided. Availability The ability of an item to be in a state to perform a required function under given conditions at a given instant of time or over a given time interval. Maintainability.2. when the maintenance is performed under stated conditions and using stated procedures and resources. Target & Life Cycle Costing Page 14 . and Maintenance support performance) Reliability The probability that an item can perform a required function under given conditions for a given time interval (t . Life cycle costing Process of economic analysis to assess the life cycle cost of a product over its life cycle or a portion thereof. Life cycle cost (LCC) Cumulative cost of a product over its life cycle.1 Definitions Life cycle Time interval between a product’s conception and its disposal. Cost profile Graphical or tabular representation showing the distribution of costs over the life cycle (or portion thereof) of a product. (It is assumed that Availability depends on the following three system performance measures:. Life cycle cost breakdown structure Ordered breakdown of the elements of cost to arrive at a product’s total life cycle. t ) 1 2 . Maintainability The probability that a given active maintenance action for an item under given conditions of use can be carried out within a stated time interval. Reliability.

maintain. and repair a system. repair parts. stocking. under a given maintenance policy. and so on. procurement. selection. to provide upon demand.Maintenance support performance The ability of a maintenance organization. Target & Life Cycle Costing Page 15 . support equipment. facilities. under given conditions. the resources required to maintain an item. Corrective maintenance The maintenance carried out after fault recognition and intended to put an item into a state in which it can perform a required function. Logistics support The materials and services required to operate. and distribution of spares. Logistics support includes the identification. Preventive maintenance The maintenance carried out at predetermined intervals or according to prescribed criteria and intended to reduce the probability of failure or the degradation of the functioning of an item. scheduling.

For instance. electrical power plants. DOD-HDBK-787. After that period. Acquisition strategies must then be structured to achieve these goals. The ILS has some derived programs such as NAVMAT. The policy for DTC is addressed in DODD 4245. ”Defense Acquisition Program Procedure” DODI 5000.2. discrete cost elements shall be translated into “design to” requirements. ILS is defined as “ a composite of elements necessary to assure the effective and economical support of a system or equipment at all levels of maintenance for its programmed life cycle” in DOD Directive (DODD) 4100.1 which is implemented by DOD Instruction (DODI) 5000.2. operation. Nondirective guidance implementing DTC may be found in the DOD Design to Cost Handbook. and acquisition. NAVFAC.2 Brief History of LCC analysis We find one of the roots of LCC analysis in some US-Department of Defense (DOD) programs.DOD has incorporated optimization of LCC into their activities such as logistics. Design-to-Cost (DTC) procedures have been included in all major U. During the period of 1970s to the beginning of 1980s. the DTC program was approved as a tri-service document (MIL-STD-337). of 1968 . a program called “Acquisition Category One (ACAT I)”and in the “Design-to-Cost (DTC)”procedure. and other systems commands. Cost parameter shall be established which consider the cost of acquisition and ownership. BUPERS. Army aviation procurements since 1972.S. the concept of minimization of LCC is found in a process named “Integrated Logistics Support (ILS)”.35 issued in Nov. and details a policy basis for weapon system acquisition processes. the applications of LCC analysis have spread to other industries such as aircraft.3 issued in 1983. The DOD’s policy on this concept is. etc. The policy is interpreted into DOD Directive (DODD) 5000. Target & Life Cycle Costing Page 16 . DTC goals should be established for all elements of future LCC which are design controllable. In 1989. the LCC analysis was mainly applied in the military field.2 specifies that LCC should be considered for decision at each milestone. ACAT I is a program for major weapon systems.

00 today over time? [Think what will be the real value of the loan made to your no-good brother-in-law if it every gets repaid. In general. Accounting wants to maximize project net present value as the only criteria. 4.] 2. and time. What is the future value (FV) of US$1. factors for projects such as estimated uncertainty errors. and so forth. Maintenance Engineering wants to minimize repair hours as the only criteria. 3. internal rates of returns. Management is responsible for harmonizing these potential conflicts under the banner of operating for the lowest long term cost of ownership. Shareholders want to increase stockholder wealth as the only criteria. Production wants to maximize uptime hours as the only criteria. 2. Consider these typical problems and conflicts observed in most companies: 1. and 6. Discount factors reflect a host of relationships and considerations which include very low risk investment returns such as Government T-bills. Accounting and finance organizations set internal discount rates (which often change) to make economic decisions easy for engineers. money. LCC can be used as a management decision tool for harmonizing the never ending conflicts by focusing on facts. 5. Reliability Engineering wants to avoid failures as the only criteria. Why should engineers be concerned about cost details for LCC? It is important to help engineers think like MBAs and act like engineers for profit making enterprises--It’s all about the money! Economic calculations are well defined but the discount rate is important (US Government 2002). consider a typical discount value of 12% which is neither very low nor very high for calculations which will follow (the discount rate can also be used for inflation/deflation factors): 1.2.] Target & Life Cycle Costing Page 17 .3 WHY USE LCC? LCC helps change provincial perspectives for business issues with emphasis on enhancing economic competitiveness by working for the lowest long term cost of ownership which is not an easy answer to obtain. Project Engineering wants to minimize capital costs as the only criteria.00 received over time? [Think what will be the value of your pension if you can live long enough to collect on it. What is the present value (PV) of US$1.

Target & Life Cycle Costing Page 18 . the company pays taxes. So once again. tax numbers are used to calculate cash flows. Often straight line depreciation is used for internal accounting reports of profit/loss and for calculating NPV. For calculation purposes. All equipment has a finite life based on both deterioration and obsolescence. The discounting method summarizes transactions over the life of the investment in terms of present or future dollars. consider the tax rate is 38% based on the profit before tax numbers. we can have the single number engineers always want—it’s NPV but in this case. Straight line depreciation is based on consumption of a fixed percentage of the equipment cost. single value. and the sum of all present values gives the NPV. After the taxis included. When profit before tax is negative. you lack enough details to arrive at a positive NPV. criteria for a project—the answer for LCC is called net present value (NPV).Cash flows into/out of a business. it’s the least negative NPV. Income tax rates vary and may require inclusion of state as well as federal taxes.NPV is the present value of proceeds minus present value of outlays. Most fixed assets and other projects have a limited useful life. the cash flow is discounted to get present value. the company receives a tax credit either a carry-back or carry-forward. Projects and processes with the greatest NPV is usuallythe winner. When profit before tax is positive. Thus many improvement projects must be selected on the least negative NPV values from many alternatives. Profit before taxes may be positive or negative. Engineering always want a simple. For a project or process. Often for incremental changes on a project or within a plant. Table 1 discount rates (used as multipliers or dividers) put financial transactions into the present value of money to answer the two questions posed above. The most common depreciation methods is straight line depreciation based on acquisition cost less salvage.

2. The steps are : Step 1-Identify what has to be analyzed and the time period for the project life study along with the appropriate financial criteria. LCC follows a process . Target & Life Cycle Costing Page 19 . Step 2-Focus on the technical features by way of the economic consequences to look for alternative solutions.4 Procedure LCC includes every cost that is appropriate and appropriateness changes with each specific case which is tailored to fit the situation.

Step 8-Sort the big cost items into a Pareto distribution to reconsider further study. Step 4-Select the appropriate cost model. etc Step 10-Study uncertainty/risk of errors or /alternatives for high cost items as a sanity check and provide feedback tothe LCC studies in iterative fashion Step 11-Select the preferred course of action and plan to defend the decisions with graphicsThe basic tree for LCC combines acquisition andsustaining costs as shown in Figure 2. If you acquire equipment. and you can’t sustain without someone havingacquired the item. Step 5-Acquire the cost details.Acquisition Target & Life Cycle Costing Page 20 . Step 9-Test alternatives for high cost items such as what happens if maintenance cost is ±10% than planned.Step 3-Develop the cost details by year considering memory joggers for cost structures. Step 6-Assemble the yearly cost profiles. simple with some variability for repairs and replacements. etc. simple discrete. Acquisition and sustaining costs are not mutuallyexclusive. you must sustain theacquisition. Step 7-For key issues prepare breakeven charts tosimplify the details into time and money.required by project complexity. complex with random variations.

building the input database.and sustaining costs are found by gathering thecorrect inputs. evaluating theLCC and conducting sensitivity analysis to identify costdrivers. Target & Life Cycle Costing Page 21 .

Engineering sizes and aims the LCC cost funnel. For example. What cost goes into each branch of the acquisition and sustaining branches? It all depends on the specific case and is generally driven by common sense. including staffing costs). Building a pulp and paper mill or modifying coke drums at arefinery to prevent characteristic overstress which occurs during coke drum quench cycles have different coststructures. can deliver significant long term financial and environmental benefits. Building a nuclear power plant to generate electricity requires special categories under each item of acquisition cost and sustaining cost. Target & Life Cycle Costing Page 22 . 2. Include the appropriate cost elements and discard the trivial elements which do not substantially influence LCC.5 Importance of LLC in this era The life cycle costs over the life of an asset are widely acknowledged as a better indicator of value for money than the initial acquisition/construction costs alone.Acquisition costs have branches for the cost tree shown in Figure 3 as a memory jogger. Sustaining costs have branches for the tree as shown in Figure 4 which is also a memory jogger. production/maintenance pour money into the LCC money funnel. the costs of owning and occupying an office building over a 30 year period are typically in the broad ratio of 1 (construction costs) to 5 (maintenance costs) to 200 (cost of the operations being carried out in the building. It is therefore clear that a greater focus on the maintenance and operating costs of assets rather than on capital costs alone.

Achieving and demonstrating better value for money in projects Evaluation of competing options.allow you to deduct more of the asset's expense in the initial years of use. for example. you'll be earning less income from it while receiving the same write-off you got when the product was first put into production. Though this may make the steady write-off attractive as a percentage of income earned from the asset. either for entire assets or parts thereof Performance trade-offs against cost (e. asset and client for which it is undertaken.  Paying Back Loans Target & Life Cycle Costing Page 23 . It also provides methods for evaluating the cost benefits of incorporating more sustainable options into constructed assets. Typical benefits can include:        Transparency of future operational costs .It provides a tool for the economic evaluation of alternative sustainability options exhibiting different capital.LCC is also a key element in the assessment of environmental sustainability in construction. Improved awareness of total costs Ability to manipulate and optimise future costs at the design stage. 2. environmental performance). This may not be the case. that write-off may not be enough to make up for the loss in productivity. Clearly the specific benefits to be gained from carrying out a LCC analysis will depend on the purpose of the exercise and the circumstances of the project.g. Other methods -.  Drop in Productivity The life-cycle costing concept assumes an asset will be as productive in later years as it is when it's new.6 Limitations of life cycle costing  Early Struggle for Profitability The life-cycle costing method spreads the expense of an asset out evenly over several years. Ability to plan for future expenditure (e. operating costs or resource usage.such as double declining balance depreciation or using the provisions of Internal Revenue Service Section 179 -.g. gradually slows down. This can be particularly important when you're starting a business and need as many write-offs as possible to reach profitability. through the establishment of sinking funds). If a piece of equipment.

writing off equal amounts of the cost during the asset's life cycle can cost you in interest charges. The earlier you pay down a loan.If you borrow money to purchase an asset. You'd be better off depreciating as much of an asset as possible in the opening years of its life so the dollars you write off will have nearly the same value as the dollars you spent when you bought the asset. a declining dollar could mean that your depreciation becomes worth less and less as years go by. Because the life-cycle method spreads the dollar cost of an asset over many years in equal increments. Target & Life Cycle Costing Page 24 . You'd fare better by writing off a larger portion of the asset during its early years so you can save on taxes and apply the savings to paying down the loan.  Value of the Dollar The dollars you write off toward the end of an asset‘s life cycle may not have the same value as dollars at the beginning. the lower your interest expenses will be because interest is assessed each month on the remaining balance.

Increase Economies of scale in Milk Unions (Procurement/ Marketing) Capacity expansion and modernization of the dairy plants. Target & Life Cycle Costing Page 25 . Ltd Contact Name:. Ensure grass root level presentation of the Cooperative movement. came into existence in 1973 with a twin objective of providing remunerative milk market to the Milk Producers in the State by value addition and marketing of produce on one hand and to provide technical inputs to the milk producers for enhancement of milk production on the other hand.  To ensure viability and growth of Milk Unions by converting surplus milk into products and ensure their marketing.Analysis of Implementation of Target at the Punjab State Coop. Serious thrust on increasing marketing orientation . Although the federation was registered much earlier. Finance) The Punjab State Cooperative Milk Producers‘ Federation Limited popularly known as MILKFED Punjab.  To provide fresh hygienic milk to urban consumers at reasonable rates.  To modernize existing Plants and upgrade technology from time to time.25 billion in 2006-07 to INR 26 billion in 2012-13. Mission Statement To Support the Milk Producers in uplifting their rural economy.Bhupinderjit Singh (Dy. Manager. but it came to real self in the year 1983 when all the milk plants of the erstwhile Punjab Dairy Development Corporation Limited were handed over to Cooperative sector and the entire State was covered under Operation Flood to give the farmers a better deal and our valued customers better products. Milk Producer’s Fed. Objective of the company:  To bring prosperity to Milk Producers in the State through assured market and remunerative prices all round the year. make all the Milk Unions viable and ensure quality Milk & Milk Products to consumers Vision Statement      The vision for the next five years is to triple the turnover the federation from level of INR 7.

Milkfed is using target costing by the name of standard costing since 1994. Earlier they were using performance costing and marginal costing. Benefits or need of transition from performance based costing to Target costing:      Helps to compete with other competitors in the market Helps to eliminate the non performing activities Helps in increasing the market share Better co-ordination among production. 1. For the first time . For the second time. Milk Cheese & Paneer Fresh Drinks Ghee & Butter Ice-cream Milk Powder Fresh Products Skimmed Milk Powder Indigeneous Sweets Skimmed Milk Powder TARGET COSTING AT MILKFED.marketing and suppliers results in better product. Target & Life Cycle Costing Page 26 . So. they used it for ―Pinni‖ in order to take over market share of local sweet makers.Lotus and BABA ice-cream were entering into the market who were charging less as compared to Verka Ice-cream product.in 1994 they started using target costing for ice-cream as other competitors like Amul .they set the target price for sale as per the market prevailing price. It has formulated company specifications for its milk & milk products to provide standard and quality of products to consumers. Production meets the sale targets and hence profit.Products: Milkfed is offering following products to the market. 2.

560-580 38. (By Wt.) Milk Fat % (Minimum) Acidity.5 13 0. Emul.Departments involved in target costing are:     Marketing Production Suppliers Research and development team Limitation:   Sometimes it become difficult to locate the target area to decrease the cost Can result in the conflict among teams Sales of Ice cream in Verka 25 20 Sales in lac Litres 15 Sales of ice-cream(Lac Litres) 10 5 0 2006-07 2007-08 2008-09 2009-10 2010-11 ICE CREAM Weight (g/lts.50 0. Sucrose % Max.) Stab. % Max.A. Total Solids (Min.25 14.) (By wt.5.) Min. Target & Life Cycle Costing Page 27 . % (Max) By Wt. L.

Direct material cost. Processing cost.50. Indirect costs .57 22.)Direct Material Cost (Rs.) Phosphates Test 2.)Processing Cost Fuel and boiler House Power Target & Life Cycle Costing per annum 1950000 3500000 Page 28 .66 7.Bacterial Count/g (Max) Coliform/g (Max.13 139. For 175.34 5. 2652 1496 464 78.)Packaging Cost Brick Carton Qty In Kgs 13 11 14.5 0.25 Rate in Rs.03 2.82 4886. Direct labour cost(for only extra labour employed for one shift production). 204 136 32 225 400 Cost in Rs. Repair and maintenance.57 4886.35 0.75 100 95. depreciation of plant/ machinery /vehicles/buildings/furniture. Costs associated with the ice cream product Direct cost.000 90 Neg. Electricity and water cost. Cost Per 800 ml Brick Cost Per 5000ML Gal Direct Material Cost Cost of Fat Cost of Solid not Fat Sugar Miracle Super Flavour Wastage@2% a.00 Ltrs Of Ice-Cream) Cost of Nuts(35gms/ltr) b.62 32. Packaging cost.5 c.Administrative costs.

Breakeven point = (Total Fixed Cost )/(Contribution per unit) If the cost so obtained increases over breakpoint then it is plus in margin for a company but increase in production should be atleast such that realization equals the Variable cost.2.34.)Direct labour (For only extra labour employed for one shift production) e.00 As Net loss is Rs.69 6.34 in Gallons.5 8.6 16.86 200 150 50 400 7 1.Oil& Lubricant Repair and maintenace other consumables Total Variable cost Fixed Cost Per Litre Salary Depreciation Total cost 578 2.05 Product Type Variable Cost Realization Contribution Fixed Cost Net Loss MRP Bricks 37.11 in case of bricks and Rs.34 355.55 228.5 263.55 6.8 43.88 4.29 220.19 10.11 65.5 1. Where.Water 400000 5850000 2.25 d.66 Particulars Direct Material Packaging Target & Life Cycle Costing Percentage 47% 5% Page 29 . Break-up of Target Cost for Brick(800 ml) Per Unit 27.64 14.50 34.71 8.99 42.83 37.16 42.47 2.Volume of Production is increased in order to achieve the breakeven point.)Other Variable Cost Petrol.00 Gallons 220.19 41.80 2.

86 Tax 38.8 14.60 2.selling & distribution etc) 172.64 7.035 Other Variable cost(electricity.22 355 Target cost Percentage 41 % 2% 4% 3% 9% 41% 100% Target & Life Cycle Costing Page 30 .035 4% 5% 13% 26% 100% Contribution in Per Unit Cost (Brick) 13% Direct Material Direct Labour 47% 26% Packaging Cost Processing Cost Variable Cost Tax 4% 5% 5% Break-up of Target Cost per 5000ml gallon Particulars Per Unit Direct Material 171.Processing Direct labour Tax Other Variable cost(electricity.865 58.5 Processing 16.25 Direct labour 14.65 Packaging 7.selling & distribution etc) Target cost 2.

Contribution in per unit cost(5000ml Gallon) 9% Direct Material 41% Direct Labour Packaging Cost Processing Cost 41% Variable Cost Tax 4% 3% 2% Target & Life Cycle Costing Page 31 .

Vision To strengthen our position as a leading player in the hospitality landscape. The hotel offers 114 spacious. with 60 operational hotels across 40 cities in India and overseas. ft. Located in the heart of Chandigarh‘s industrial hub is Hometel Chandigarh. Target & Life Cycle Costing Page 32 . It provides a consummate and unmatched international hospitality experience at competitive price offerings. The 8200 sq. size and the market niche they serve. banqueting area is the largest in the city with a capacity to organize and handle receptions of up to 600 guests. The properties vary by type. The hotel is 10 minutes away from the Chandigarh Railway Station and Airport and also enjoys proximity to Delhi–Chandigarh National Highway and the famous Rajiv Gandhi Chandigarh Technology Park. and is now the third largest chain in India. It has a diverse portfolio encompassing hotels.Analysis of Target Costing at Sarovar Hotels and Resorts Sarovar Hotels & Resorts pioneered in venturing into the mid-market segment in the Indian hospitality landscape. restaurants and corporate hospitality. air-conditioned rooms coupled with modern amenities and facilities. The Company over a period of 18 years has successfully churned the demand in this segment. resorts.

It is their keen understanding of the hospitality business and their experts in technical knowledge that has propelled the Company to the forefront of the hotel industry. continuous satisfaction and growth opportunities while treating each other with respect and dignity To recognize that profitability is essential to our future success and therefore provide our property owners and investors the highest possible returns To focus on our growth and maintain consistency in product through warm. Through experts and a comprehensive involvement it tries to make every project a success. continued development of staff and an intricate understanding of the needs of the Indian market and consumer have catapulted the Company to its present glory. personalized service and absolute transparency in all our dealings To contribute positively to our communities and our environment Ethos In the global communion. It has pioneered unique food and beverage concepts. It has been associated with a number of prestigious projects from time share groups. It follows the principle ('collaboration is the key word to mutual success and growth') Experience The Company is managed by competent professionals endowed with a wealth of experience. The Company firmly believes that mutual respect. A strong focus on the proverbial bottom line. Sarovar Hotels has capitalized on the emerging business opportunities by adopting a dynamic and performance driven approach. evolving constantly and adapting swiftly. Expertise Sarovar Hotels is one of the few hospitality groups that has access to a vast reservoir of experienced professionals and technical experts. construction giants. Geoffrey's Pubs are unanimously hailed as some of the finest in the country. Target & Life Cycle Costing Page 33 . long term partnerships and strong ethics and integrity are essential to achieve ultimate success. Sarovar Hotels continues to enter into strategic tie-ups and excels through innovative hospitality solutions.Mission      To provide our guests a superior hospitality experience at excellent value in varied market segments To provide our employees a great work environment. premier educational institutes and other industry leaders.

all of whom have held senior management positions with the finest hotel companies in India and overseas. train and develop a level of talent otherwise difficult to achieve for a single unit property. It aims to extend the same Sarovar Hotels hospitality experience in every city across India. retain. Engineering. Target & Life Cycle Costing Page 34 . Value for money marketing strategy. which extends equal opportunities of growth and progress for all its employees and partners by providing them continuous training and counselling at every stage. Kitchen. Finance and Sales and Marketing. Continuous training and upgrade opportunities. Housekeeping. Future Sarovar Hotels is continuously working towards developing world class systems and a training culture to deliver customer delight by continuously raising the levels of customer satisfaction. Ability to identify market gaps / niches and expand rapidly to fill the same. A strong sales network across India backed by the support of the global sales offices of Carlson Hospitality Worldwide. you are invited to be a part of this journey in achieving mutual goals and setting quality benchmarks for others to follow. A strong nationwide network with the ability to deliver business to hotels.The Company offers its partners           A team of thorough professionals with an exemplary track record. Young and very motivated team of mid-level managers. Ability to attract. There is a constant endeavour to evolve into a progressive organization. proactiveness and ability to predict and adjust to environmental forces. As the Company takes on the challenges of exploring new opportunities in the hospitality business. Strong adaptability. A strong team of corporate operating heads supported by senior specialists in Food and Beverage.

What goals do you wish to achieve through the use of Target Costing? Ans. We have been using this technique for two years now . we do use Target costing in our company. It gave us actual costing figures. Q.     Cost Control Wastage Costs under control Emphasis on Quality with competitive prices Pre-empt Selling Prices Q.Contact Name: Mr. According to you what are the benefits of using Target Costing? Ans. To be able to control the targeted cost and provide premium services at competitive prices Target & Life Cycle Costing Page 35 . Q. Which areas/departments are involved in the target and lifecycle costing process? Ans. Food &Beverage (F&B) Service and Food &Beverage (F&B) Production Q. Q. Corporate) Summary Of The Conversation and Questionnaire at Hometel Chandigarh Q. Narpat Singh (Finance Manager. We cannot disclose that but it is done by the F&B controller. If yes how long have your company been using this technique? Ans. What are the techniques used for implementing target Costing taking place in your company? Ans. after wastage and non chargeable sales. Yes.We started using it in 2010 at Hometel. How was the transition ? Ans. Does your company use the Target or Lifecycle Costing? Ans. Q.

Tractors. Successful technology absorption in all product groups through collaborations with world renowned manufacturers & further strengthened by continuous in house R&D. Die Casting & Plastic Processing Machinery. Corporate Vision To be Global Engineering Conglomerate focused on Customer delight in our fields of endeavour. Printing Machinery. Target & Life Cycle Costing Page 36 . CNC Systems & Bearings.Analysis of Target Costing at HMT Incorporated in 1953 by the Government of India as a Machine Tool manufacturing company. which also manages the Tractors Business directly. HMT comprises five subsidiaries under the ambit of a Holding Company. Today. Over the years diversified into Watches. Metal Forming Presses.

71 620.00 0.35 760.35 760.00 750.11 0.318.92 -585.41 0.91 196.00 -453.341.24 143.00 443.72 254.42 573.15 Target & Life Cycle Costing Page 37 .00 760.35 -506.00 -382.35 760.20 0.98 1.Corporate Mission To establish ourselves as one of the world‘s premier companies in the engineering field having strong international competitiveness To achieve market leadership in India through ensuring customer satisfaction by supplying internationally competitive products and services To achieve sustained growth in the earnings of the group on behalf of shareholders Financial Position Of The Balance Sheet Balance Sheet of HMT ------------------.07 520.00 0.91 1.15 341.00 820. ------------------Mar '11 Mar '10 Mar '09 Mar '08 12 mths 12 mths 12 mths 12 mths Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 760.65 454.00 618.00 697.323.711.35 760.70 231.216.00 0.35 443.26 598.27 760.94 324. Cr.35 443.99 366.in Rs.00 0.35 443.35 760.12 1.00 0.

98 1.55 142.09 2.22 1.37 412.71 4.00 124.93 22.84 0.34 Target & Life Cycle Costing Page 38 .09 214.27 14.216.54 71.30 10.48 136.49 512.85 743.40 4.02 116.58 726. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA.81 243.29 1.82 132.07 2.93 164.31 0.74 68.00 0.49 93.69 102.42 39.68 0.35 574.93 36.Mar '11 Mar '10 Mar '09 Mar '08 12 mths 12 mths 12 mths 12 mths Application Of Funds Gross Block Less: Accum.02 90.89 9.66 2.73 1.318.00 167.33 550.731.52 3.26 70.69 655.60 39.46 515.00 1.341.37 207.56 765.61 29.00 0.64 4.46 0.71 52.49 1.38 74.00 68.91 0.04 120.39 100.36 29.64 2.46 100.71 40.11 536.323.36 72.37 0.40 104.15 8.97 765.29 765.40 96.85 765.84 583. Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs) 136.64 710.56 75.56 28.00 138.02 7.08 2.90 624.44 2.66 7.20 194.

Hence we do not use life cycle costing. But target costing is very useful in different areas of our organization i. risk management and demand management. Q3) Does your company refer to this technique by any other name? If yes please mention the name. value management. PINJORE Contact Names:. General Manager. design and maintaining better quality of the product etc.COSTING SYSTEM IN TRACTOR BUSINESS GROUP. new development of product. Q2) If yes. Questionnaire & Responses Q1) Does your use company use target and lifecycle costing? Ans) We use only target costing. Lifecycle Costing Tractor Industry is a manufacturing industry but Life cycle costing mainly used in financial appraisal. for how long have you been following this technique? Ans) We have been using target costing since the eighties when competition with other players in the field of farming tractors got intense. cost reduction. Target & Life Cycle Costing Page 39 . Finance). Shri Arun Chaddha (Joint General Manager. Target Costing In our tractor division. we use batch costing and absorption costing system. Finance) Summary of the conversation that took place. Ans) No we do not refer target costing by any other name. Target costing is mainly used in assembly industries and processing industries.Shri RL Verma (Dy.e.

3) Purchase Department Q5) What goals do you wish to achieve through target costing? Ans) 1) To remain competitive in the market while maintaining highest quality control.Q4) What areas/departments are involved in the target costing? Ans) 1) Our research and development unit. Target & Life Cycle Costing Page 40 . 2) Planning department that forecasts requirement of raw material. Q6) According to you what are the benefits of target costing ? Ans) 1) Enhanced presence in the market due to new designs/features coupled with competitive pricing. 2) No wastage of resources. 2) To attract a major share in the tractor business.

Brand vision One step ahead of the dreams of the mobile society History The company was incorporated in 2000 with a staff of 13. US$2 Billion conglomerate with diversified interests. India. and applications with headquarters at Parwanoo in Himachal Pradesh.Analysis of Life Cycle Costing at Spice Digital Spice Digital Spice Digital Limited is a part of the esteemed multi faceted management group Spice Corp and was incorporated in year 2000. Target & Life Cycle Costing Page 41 . It invested Rs 100 crores. Spice Digital is a part of Spice Global. services.[1] The Company offers services for Telecom Operators. Spice Digital now has significant years of experience in the VAS services and is committed to be the number one home of trusted. in July 2006. Enterprises and Government. USSD. WAP. IVR. to soup up its technology and expand its product line. 3G & Mobile Applications. SMS. using different mobile connectivity medium of Voice. It revamped its operations in 2007 to enhance its Research and Development capabilities. It set up a Rs 50 crore incubation fund for up start ventures. entertainment. The company doubled its employee strength in 2006 taking its headcount to 400 by year end. Spice Digital Limited. previously Cellebrum Technologies Limited. is a developer of Mobile Value Added Services (MVAS) and Internet products. rich and compelling services in the area of mobile communication. infotainment and commerce by 2011.

Target & Life Cycle Costing Page 42 .Products: Mobile Value Added Services (MVAS). INDIRECT EXPENDITURE Delivery and installation cost+ consumer service cost. Customer service cost includes the cost of contacting the customer on a fixed time basis so that the problems can be reviewed and solved if there are any problems. Internet products. COSTING CONTROL Total Cost = R&D Cost + Design Cost of Product + Distribution Cost + Customer Service Cost The Research and Development cost includes the researches done to develop the soft wares wchich help in programing the VAS(value added services) and the major chunk of it is consumed by the salaries of the technical leads in the project.) Pin Code: 173 220 Fax No: 01792-232344 Phone Numbers. By this way company finds the actual cost of the software.P. GROSS PROFIT =Gross Turnover – Direct Cost. Contact: India Address: Himuda Commercial Complex Opposite Hotel Shiwalik Sector-1 Parwanoo District: Solan (H. Distribution cost includes the cost of delivering and installing all the required software at the clients end. Telephone & other Bills + Overheads. services and applications. NET PROFIT =Gross Profit – Indirect cost. The design cost gives the idea of the designing of the software and it is consumed mainly in graphical VAS of the project. DIRECT EXPENDITUTRE R and D cost + Labor of each employee + Maintenance Cost + Wages + Other Expenditure. COMPANY’S VARIABLE COST Variable Cost = delivery and installation cost+ consumer service cost.: 01792-232368 COSTING PRACTICES COMPANY’S FIXED COST Fixed Cost = employee‘s Salary + Rent+ Electricity.

87.300 1lakh Rs 330000000 Life Cycle Costs R & D Cost Design Cost of Product Marketing cost Distribution Cost Customer Service Cost Packaging cost Total Life-cycle incurred Cost(D) Rs 6.000 Rs 19.000 Rs 22.59.23.94.00.000 Rs 2.00.00.000 Rs 39.000 Rs 1.45.00. Selling Price of the software (A) Sales quantity in units (B) Target revenue (A*B=C) Rs 3.Software package of SPICE DIGITAL LTD.000 Rs 115732000 Life cycle Operational Income (C-D) Rs 214268000 Target & Life Cycle Costing Page 43 .

This places them a cut above the rest when we talk of quality born of work culture. economical price and ethical business dealings earned them instant acceptability. altogether. the Group occupies a unique position in the industry. Avon Cycles came into being in 1952 when the first batch of 250 bicycles rolled out of its plant. the Pahwas set out on a long and arduous journey. Starting up a bicycle saddles and brakes manufacturing unit in 1948. built enduring business bonds with a vast dealer network in India and abroad. AVON has remained in the top performers‘ position for over half a century. By way of thanksgiving for its prosperity. To meet their expanding requirement of raw materials. High-class technology. From amongst the pioneers of the Indian bicycle industry. they support two modern hospitals looking after the poor and the less fortunate of our brethren. consistent quality and effective after-sales service made up a perfect proposition. Holding these values close to their hearts they built the trust brick by brick Starting up a bicycle saddles and brakes manufacturing unit in 1948. achieving full backward integration. They did not venture into Tyre and Tubes. these being in a different discipline. Avon Cycles came into being in 1952 when the first batch of 250 bicycles rolled out of its plant. Today. The founders Pahwa Brothers dreamt of giving the common man of this country an affordable means of mobility in those early days of our country‘s independence. they added facilities for making Steel Strips. Excellent quality.classic example of the enterprising Punjabi spirit. The numbers have been going up. They have facilities for making almost all the parts. The promoters‘ abiding faith in human values and fairness. AVON is the only group anywhere in the world with full backward integration. Target & Life Cycle Costing Page 44 . unmatched and unequalled anywhere else.Analysis of Implementation of Target Costing at Avon cycles: GROUP HISTORY The beginnings were humble . ever since. the Pahwas set out on a long and arduous journey. Steel Tubes and Hot Rolled Steel. including Steel Balls needed for their Bicycles.

Some of the workers joined the company in their youth and now. Technological innovation has been one of the most natural advantages of its organisational structure.  To decide on price of new bicycle they first check the prices of similar products in market from competitors such as Atlas. In fifty-two years of its being. the company is committed to delivering quality at affordable price. Girls etc.  Company launches the product in market and according to the demand it produces number of bicycles. Target & Life Cycle Costing Page 45 .  To meet the Target price company takes into account production cost. Target cost for bicycle is divided in following parts: Raw material Labour Cost Electricity charges Paint Cost Polish Cost Maintenance charges Advertising cost Transport and Distribution Cost So company uses the basic target costing technique and tries to adjust to target cost. The highly motivated work force carries a sense of belonging. it has invested heavily in its human capital. Avon decide on Target price of their product equal or less than competitors. Target Cost is determined by subtracting Target profit from Target price.The family business was reorganised in 1997 and the flagship company is the subject of this profile.  Target profit or income per unit of bicycle is determined. Their happiness is the key to its growth.).marketing cost . COSTING METHOD From the information provided by the company following information is interpreted:  Company plans to produce a new product after market research and for a particular population segment (eg. Kids. VISION As a manufacturing company.distribution cost .design cost ( cost to design various parts of bicycle). their second generation is growing with it to be old enough to bequeath their trust to the generation next.

Controlling the targeted cost. We started using this technique when brands like Verka. Which areas/departments are involved in the target and lifecycle costing process? Ans. Contact Name: Mr.Analysis of Target costing At BABA DAIRY About Jas&Me Ice Cream Jas&Me ice cream brand was started by Baba Dairy which was first under the name of Baba Ice creams. Q.Mother Dairy started using this technique to be able to give highest competition as local player. The company was founded by Satpal Singh in 1997 at Chandigarh under the mission to give a tough competition to the major players of Punjab region esp. Lotus Ice creams etc. According to you what are the benefits of using Target Costing? Ans. Financial Manager) Summary Of The Conversation and Questionnaire at Sec 21 Chandigarh Q. Verka. How was the transition ? Ans. Production of Mix and Processing department Q. Does your company use the Target or Lifecycle Costing? Ans. Q. It helped to get actual cost figures so we could adjust are processing and mix cost accordingly. The company has vision to be a national player in next 7 years expanding their horizons to complete North Region by 2015. What goals do you wish to achieve through the use of Target Costing? Ans. we use Target costing in our company. Q. Target & Life Cycle Costing Page 46 . To be able to providebest quality at Competitive prices and take the brand at National Level Q. Prabhjinder Singh (Co-Owner. If yes how long have your company been using this technique? Ans.

96% 100% Per unit cost 1 4 4 1 1 Mix cost Processing Packaging Storage 40 Transportation Pilferage/Processing Loss Target & Life Cycle Costing Page 47 .96% 1.84% 1.96% 1.Cost of Product Mix -10% fat (160 ltr) Particulars 100 kg Milk 30 Kg cream 10 Kg SMP 24 Kg Sugar 400gm Emulsifier Total Cost Add Processing Charges Net Cost Mix Per Ltr cost 8700 1200 1700 960 320 10480 1050 11530 72 Brick 1000ml Particulars Mix cost Processing Packaging Storage Transportation Pilferage/Processing Loss Target Cost Dealers Price Net Profit Per Unit* 40 4 4 1 1 1 51 72 21 Percentage* 78.84% 7.43% 7.

Target & Life Cycle Costing Page 48 .

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