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Table of contents

Introduction ......................................................................................................................................2 Target Costing ....................................................................................................................................2 Explanation ...................................................................................................................................3 History ...........................................................................................................................................6 Objectives of Target costing approach .................................................. Error! Bookmark not defined. MAJOR STEPS OF TARGET COSTING ................................................................................................7 Main Features of Target Costing System .........................................................................................8 Advantages of Target Costing .........................................................................................................9 Problems with Target Costing ....................................................................................................... 10 Impact of Target Costing on Profitability ....................................................................................... 11 Life Cycle Costing ............................................................................................................................. 12 Introduction and Concept: ............................................................................................................ 12 Features of Life Cycle Costing ....................................................................................................... 18 Product Life-Cycle ........................................................................................................................ 19 Phases in Product Life-Cycle: ........................................................................................................ 20 Benefits in Product Life Cycle………………………………………………………………………………………………………….. 23 Analysis of Implementation of Target and Life-Cycle Costing at AVON CYCLES ................................... 24 Analysis of Implementation of Target and Life-Cycle Costing at Lafarge Ind. Pvt. Ltd. ......................... 25 Analysis of Implementation of Target and Life-Cycle Costing at Philips India Ltd. ............................... 29 ANALYSIS OF IMPLEMENTATION OF TARGET AND LIFE-CYCLE COSTING AT Quark .. Error! Bookmark not defined. Analysis of Implementation of Target and Life-Cycle Costing at Hero Moto Corp. Ltd………………........ 45 References....................................................................................................................................... 47

Target & Life-Cycle Costing

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Introduction
In production, research , retail, and accounting, a COST is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production. More generalized in the field of economics, cost is a metric that is totaling up as a result of a process or as a differential for the result of a decision .Hence cost is the metric used in the standard modeling paradigm applied to economic process. Companies nowadays are indulging in two main aspects in order to control cost of their products so as to have an competitive edge in the market: 1) Target Costing 2) Product Life Cycle Costing

Target Costing
Target costing is primarily a technique for profit management. Its objective is to ensure that future products generate sufficient profits to enable the firm to achieve its long term profit plans. This objective can only be achieved if products are designed to satisfy the demands of the firm’s customers and to be manufactured at a sufficiently low cost. Target costing systems first identify the cost at which the product must be manufactured if it is to achieve its profit objective and then create a disciplined environment to help ensure that the target cost is achieved. Most target costing processes contain three distinct steps, market-driven costing, product-level target costing, and component-level target costing. Market-driven costing is used to transmit the competitive pressure that the firm faces in the marketplace to its product designers and suppliers. This pressure is transmitted by subtracting the target profit margin (i.e., the margin required of the product if it is to enable the firm to achieve its longterm profit objectives) from the target selling price (i.e., the price customers are willing to pay for Target & Life-Cycle Costing Page 2

the product) to determine the product’s allowable cost (i.e., the cost at which the product must be manufactured if it is to generate the target profit margin at its target selling price). The allowable cost is set by the market, it does not incorporate the capabilities of the firm or its suppliers. Setting the target cost equal to the allowable cost risks setting unachievable targets and thus reducing the effectiveness of target costing. Therefore, in the product-level target costing step, product-level target costs are set that are often higher than allowable costs. These product-level target costs are determined so that they can be achieved, but only if the product designers expend considerable effort on designing costs out of the future products. The objective is to create intense but realistic pressure on the product designers to reduce costs. To create an equivalent pressure on the firm’s suppliers, component-level target costing is used to focus supplier creativity on reducing the costs of the components they supply. At the heart of componentlevel target costing is establishing the price that the firm is willing to pay for each of the externally acquired components in the new product. Thus, component-level target costing enables the buyer to establish the selling prices of its suppliers. These prices must be realistic and allow the suppliers to make adequate returns if they too expend considerable efforts on designing costs out of their products. Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price. A lengthy but complete definition is "Target Costing is a disciplined process for

determining and achieving a full-stream cost at which a proposed product with specified functionality, performance, and quality must be produced in order to generate the desired profitability at the product’s anticipated selling price over a specified period of time in the future." This definition encompasses the principal concepts: products should be based on an accurate
assessment of the wants and needs of customers in different market segments, and cost targets should be what result after a sustainable profit margin is subtracted from what customers are willing to pay at the time of product introduction and afterwards. These concepts are supported by the four basic steps of Target Costing: (1) Define the Product (2) Set the Price and Cost Targets (3) Achieve the Targets (4) Maintain Competitive Costs. To compete effectively, organizations must continually redesign their products ( or services) in order to shorten product life cycles. The planning, development and design stage of a product is therefore critical Target & Life-Cycle Costing Page 3

to an organization's cost management process. Considering possible cost reduction at this stage of a product's life cycle (rather than during the production process) is now one of the most important issues facing management accountants in industry. Here are some examples of decisions made at the design stage which impact on the cost of a product. 1. The number of different components 2. Whether the components are standard or not 3. The ease of changing over tools Japanese companies have developed target costing as a response to the problem of controlling and reducing costs over the product life cycle. Now taking any case of a product of any company, there will probably be a range of products and prices, but the company cannot dictate to the market, customers or competitors. There are powerful constraints on the product and its price and the company has to make the required product, sell it at an acceptable and competitive price and, at the same time, make a profit. If the profit is going to be adequate, the costs have to be sufficiently low. Therefore, instead of starting with the cost and working to the selling price by adding on the expected margin, target costing will start with the selling price of a particular product and work back to the cost by removing the profit element. This means that the company has to find ways of not exceeding that cost. For example, if a company normally expects a mark-up on cost of 50% and estimates that a new product will sell successfully at a price of $12, then the maximum cost of production should be $8:

Cost + 100% $8

Mark-up = 50% $4

Selling price 150% $12

But you can not always go for cost reduction in all the aspects for achieving the target costing. Let us explain this point with an example. For example, if you are selling perfume, the design of its packaging is important. The perfume could be held in a plain glass (or plastic) bottle, and although that would not damage the use value of the product, it would damage the esteem value. The company would be unwise to try to reduce costs by economising too much on packaging. Similarly, if a company is trying to reduce the costs of manufacturing a car, there might be many components that could be satisfactorily replaced by cheaper or simpler ones without damaging either use or esteem values. However, there will be some components that are vital to use value (perhaps Target & Life-Cycle Costing Page 4

00.000 mixers $30 per mixer ) Less desired profit (15% $2. the marketing department believes that a price of $30 would be about right for the new mixer. distribute.00. an investment of $2.elements of the suspension system) and others which endow the product with esteem value (the quality of the paint and the upholstery). and produce these new mixers. Handy Appliance Company feels that there is a market niche for a hand mixer with certain new features. Surveying the features and prices of hand mixers already in the market.000.50 Target & Life-Cycle Costing Page 5 . and service one mixer is $22.000 mixer) $1.000 ======= $22. Given these data. marketing estimates that 40. the target cost to manufacture.000 of new mixers could be sold annually. Now we will explain this concept of target costing with the help of an example. To design.000 / 40.000 -----------$9.000 would be required.000) Target cost for 40.000. sell.50 as calculated below: Projected sales (40. develop. At that price.000 300.200.000 mixers Target cost per mixer ($9. The company desires a 15% return on investment (ROI).

History It emerged in Japan in 1960’s as a consequence of difficult market conditions.They believed good results can be achieved by combining employees from strategy. which were required to achieve parity with the toughest western competitors in terms of quality. value analysis and concurrent engineering were introduced to support the target costing. distribution. target costing is widely practiced. finance.5 target cost would be broken into target cost for the various functions: manufacturing. Target Costing is intended to get managers thinking ahead and comprehensively about the cost and other implication of the decision they make. after-sales service. Japanese companies were also facing the shortage of resources and skills needed for the development of new concepts. tools and techniques. Target Costing thus emerged from this background. Target & Life-Cycle Costing Page 6 . Now in Japan. planning. and production into expert teams. value engineering. cost and productivity. including functional analysis. as used by western firms for manufacturing . They were able to identify all relevant elements to formulate a holistic management approach in order to achieve performance levels to meet the firm’s objective. This made Japanese companies particularly effective in the area of product design and development. in more than 80 percent of companies in the assembly industries and more than 60 percent of the companies in processing industries. Objectives of Target Costing Target Costing is primarily used and most effective in the product development and design stage. Each functional area would be responsible for keeping its actual costs within target. A range of specialized tools. marketing. A proliferation of consumer and industrial of western firms were overcrowding the markets in Asia. engineering. marketing .This $22. and so on. Many Japanese companies considered modified cross-functional activities. These teams were able to examine new methods and techniques for the design and development of new products aimed at increasing the degree of integration between upstream and downstream activities of the firm’s operation.

To lower the cost of the product so that the required profit level can be ensured. 3. MAJOR STEPS OF TARGET COSTING For a successful and comprehensive target costing approach within an organization. business strategy. to calculate the target cost(which the company incurs). competition. elasticity of demand. competitive price response etc. they are also subtracted. The product meets the level of quality.The Target Costing System has three objectives: 1. 3. market share. delivery timing and price required by the market. Proper study of the market: The most important step in target cost setting is study and thought about pricing which is decided by the market or the future buyers or the target customers. We do this by deducting the desired profit margin. The target cost is allocated to lower level assemblies of system/subsystems in a manner consistent with the structure of teams or individual designer responsibilities Target & Life-Cycle Costing Page 7 . If we have a provision of non-recurring development costs. If the company is responding to a request for proposal/quotation. We need to follow the given steps 1. some other uncontrollable market allocation from the selling price of that particular product by studying the need of the customers and the prices offered by our competitors. the target price is based on analysis of the price to win considering customer affordability and competitive analysis. 2. 2. warranty reserves. Setting of target price based on market studies: Following factors should kept in mind to decide the new target price(the price to be given by the customer) company position. To motivate all company employees to achieve the target profit during the new product development to make target costing a company-wide profit management activity. Determine the target cost: Once the target price is obtained by the market studies and the data has been compiled and set properly.This is a revolution that now design is the outcome of the cost whereas in the past design influenced the cost of the product. The main emphasis should be on giving the priority to the customer needs and not just the technical requirements as required for the product development .

As such it is part of an overall profit management process. Target costing is viewed as an integral part of the design and introduction of new products. analyse and understand the value the customers places on particular product capability. Value Engineering Value engineering. Target & Life-Cycle Costing Page 8 . which incorporates its long-term strategic intent and profit margins. The target profit margin is derived from the company’s long term business plan. meets the requirements or not. interdisciplinary examination of factors affecting the cost of a product with the aim of devising a means to achieve its specific purpose at the required standards of quality and reliability at an acceptable cost.4. and use of techniques such as quality function deployment and value engineering to help make these sales among various product requirements including target cost. Balancing the target cost with the requirements: Its better to study and analyse the derived target price. Its the best opportunity to control the cost by making the proper set up of the requirements. The relationship for value directly relates two of the survival triplet – cost and function – and the goal is to increase value while maintaining or increasing reliability. Another opportunity to reduce cost of the product is consideration of the concept of the available multiple alternatives and also by designing the alternatives for both. rather than simply a tool for cost reduction and cost management . the product and its manufacturing & support process. before finalising the cost to check whether the product being produced. It requires a careful understanding of the need and expectations of buyers. It encompasses improvement in product design . as defined by Cooper and Slagmulder (Cooper 1997) is “a systematic. changes in material specifications and modification in process methods.” The Japanese value engineering programs are used to achieve the specified levels of cost reduction for the target cost and not to minimize cost. Main Features of Target Costing System The main features or practices followed are: 1. These opportunities can be achieved when there are some ideas that can be considered just out of the blue or creative consideration of alternatives developed by R&D coupled with structured analysis and decision-making methods. This can also be done at the each and every level of the development cycle of the product.

2. 3.2. The current cost is based on existing technologies and components. Reduces development cycle of a product. Advantages of Target Costing The main advantages of target costing are: 1. a target selling price is determined using various sales forecasting techniques. 5. 6. Since target selling price is market driven and should encompass a realistic reflection of the competitive environment. Critical to setting the target selling price are the design specifications (reflecting certain level of functionality and quality of the new product. given the relation between price and volume. It helps to create a company’s market-driven management for designing and manufacturing products that meet the price required for the market success. Aligns the cost of feature with the customers’ willingness to pay for them. The difference between the current costs and the target cost indicates the required cost reduction that is needed. Target & Life-Cycle Costing Page 9 . It reinforces top to bottom commitment to process and product innovation to achieve some competitive advantages. Some firms will do this by estimating the “current cost “of the new product. but encompasses the functional and quality requirement of the new product. Once the target price and required profit margins have been determined. Assures that the products are better matched to their customers’ needs. 5. especially with respect to capacity related costs(such as tooling cost) . These are based on customer requirements and expectations and are often influenced by offerings of the competitors. The next stage of the target costing process is to determine cost reduction targets. Reduces costs of products significantly. the difference between these two figures indicates the allowable cost or the target cost for the product. The expected target volumes are also critical to computing unit costs. as product costs are dependent upon the production levels over the lifecycle of the product. These activities continue throughout the design stage up until the point when the new product goes into production. A series of intense activities commence to translate the cost challenge into reality. For any given product. Integral to the setting of target selling price is the establishment of target production volumes. 4. 3. 4.

distributing.Its not this simple. Breaks down barriers between departments. on the belief that new cost reduction methods or less expensive materials will be available in near future that will make the target cost an achievable one. Encourages selection of lowest cost value added activities. 12. Target & Life-Cycle Costing Page 10 . 2. Usually if there is no evidence. This occurrence is most common when the project manager is unwilling to discontinue a design project that cannot meet its costing goals within reasonable time frame. Increases the team work among all internal organizations associated with conceiving. 10. Reduced time to market. Foster partnerships with suppliers. selling. Orients organizations towards customers. 8. 11. A large amount of mandatory cost cutting can result in finger pointing in various parts of the company. developing. marketing. especially if employees in one area feel they are being called on to provide a disproportionately large part of the savings.7. and you’re left with the target cost of the product. Implementation enhances employee awareness and empowerment. find out which feature they like and don’t like. The development of the process can be lengthened to a considerable extent since the design team may require a number of iterations before it can devise low cost product that meets the target cost and margin criteria. All. Engages customers and suppliers to design the right product and to more effectively integrate the entire supply chain. 13. it is better to either drop a project or at least shelve it for a short period of time and then try again. inside and outside the company adhere to this number . Proactive approach to cost management. Minimize non value-added activities. 15. Problems with Target Costing Talk with customers about a new product concept. and installing a product. planning. 16.Subtract an acceptable profit margin . manufacturing. and find out how much they would pay . 14. Avoiding this problem requires strong interpersonal and negotiation skills on the part of the project manager. 9. Target Costing has a few problems which are as follows: 1.

which calls for a good leader. 4.3. A design team having representatives from different departments can sometimes make it more difficult to reach a consensus on the proper design because there are too many opinions regarding design issues. its implementation requires willingness to cooperate 6. Target costing affects profitability in two ways 1. 5. Thus target costing results in better cost control and also better price control. Impact of Target Costing on Profitability Target Costing affects profitability of an organization depending on the commitment of management to its use. It also improves profitability through precise targeting of the correct prices at which the company feels it can place a profitable product in the market place that will sell in robust manner. This person must have a very good knowledge of the design process. Target & Life-Cycle Costing Page 11 . For every problem area outlined above the proper solution is retaining strong control over the design team. Requires many meetings for coordination 7. the constant involvement of cost accountant in all phases of a product’s life cycle. 2. and the type of strategy the organization follows. Effective implementation and use requires the development of detailed cost data. It places a detailed continuing emphasis on the products cost throughout the lifecycle of every product. The management team is completely aware of costing issues since it receives regular reports from the cost accounting members of all design teams. May reduce the quality of products due to the use of cheep components which may be of inferior quality. good interpersonal skills. and commitment to staying within both time and cost budgets for a design project.

there is little or no incentive to apply the principles of LCC to purchasing policy. consequently. Target & Life-Cycle Costing Page 12 . improved awareness of total costs. the application of LCC does have a management implication because purchasing units are unlikely to apply the rigours of LCC analysis unless they see the benefit resulting from their efforts. LCC techniques allow evaluation of competing proposals on the basis of through life costs. more accurate forecasting of cost profiles. the responsibility for acquisition cost and subsequent support funding are held by different areas and. It is a structured approach that addresses all the elements of this cost and can be used to produce a spend profile of the product or service over its anticipated life-span. There are 4 major benefits of LCC analysis:     evaluation of competing options in purchasing. Therefore. It is important that the cost drivers are identified so that most management effort is applied to the most cost effective areas of the purchase. In many departments. Option Evaluation. awareness of the cost drivers will also highlight areas in existing items which would benefit from management involvement. Application of LCC techniques provides management with an improved awareness of the factors that drive cost and the resources required by the purchase. The results of an LCC analysis can be used to assist management in the decision-making process where there is a choice of options. The accuracy of LCC analysis diminishes as it projects further into the future. LCC analysis is relevant to most service contracts and equipment purchasing decisions. Improved Awareness. so it is most valuable as a comparative tool when long term assumptions apply to all the options and consequently have the same impact. Additionally. and performance trade-off against cost. Why is it important? The visible costs of any purchase represent only a small proportion of the total cost of ownership.Life Cycle Costing Introduction: What is Life Cycle Costing? Life Cycle Costing (LCC) also called Whole Life Costing is a technique to establish the total cost of ownership.

together with additional professional expertise as required. Principles The cost of ownership of an asset or service is incurred throughout its whole life and does not all occur at the point of acquisition. The SRO is responsible for ensuring that estimates are based on whole life costs and is assisted by the project sponsor or project manager. Performance Trade-off Against Cost. termination or replacement of the asset or service. termination or replacement cost is extremely high and must be taken into account at the planning stage. There are other factors such as the overall fit against the requirement and the quality of the goods and the levels of service to be provided. A purchasing decision normally commits the user to over 95 per cent of the through-life costs. These Target & Life-Cycle Costing Page 13 . There is very little scope to change the cost of ownership after the item has been delivered. In purchasing decisions cost is not the only factor to be considered when assessing the options (see VFM briefing). for example major investment decisions. In the case of assets.Improved Forecasting. The principles of LCC can be applied to both complex and simple projects though a more developed approach would be taken for say a large PFI project than a straightforward equipment purchase. as appropriate.  Acquisition costs are those incurred between the decision to proceed with the procurement and the entry of the goods or services to operational use   Operational costs are those incurred during the operational life of the asset or service End life costs are those associated with the disposal.In some instances the disposal cost will be negative because the item will have a resale value whilst for other procurements the disposal. It leads to improved decision making at all levels. or the establishment of cost effective support policies. The application of LCC techniques allows the full cost associated with a procurement to be estimated more accurately. Who is involved The investment decision maker (typically the management board) is accountable for any decisions relating to the cost of a project or programme. LCC analysis allows more accurate forecasting of future expenditure to be applied to longterm costings assessments. LCC analysis allows for a cost trade-off to be made against the varying attributes of the purchasing options. The Process LCC involves identifying the individual costs relating to the procurement of the product or service. Additionally. disposal cost can be negative because the asset has a resale value.

downtime/non-availability. initial training. documentation. changes to business processes. It is important to appreciate the difference between these cost groupings because one-off costs are sunk once the acquisition is made whereas recurring costs are time dependent and continue to be incurred throughout the life of the product or service. operating costs. some examples are given below. cost of changes. All significant expenditure of resources which is likely to arise as a result of any decision must be addressed. Examples of one-off costs include:         procurement. contract and supplier management costs. facilities. Target & Life-Cycle Costing Page 14 . transition from incumbent supplier(s). service charges. The types of costs incurred will vary according to the goods or services being acquired. Explicit consideration must be given to all relevant costs for each of the options from initial consideration through to disposal. Furthermore. and transportation and handling. changing volumes.can be either "one-off" or "recurring" costs. recurring costs can increase with time for example through increased maintenance costs as equipment ages. The Methodology of LCC LCC is based on the premise that to arrive at meaningful purchasing decisions full account must be taken of each available option. maintenance and repair. implementation and acceptance. withdrawal from service and disposal Examples of recurring costs include:          retraining.

The degree sophistication of LCC will vary according to the complexity of the goods or services to be procured. Target & Life-Cycle Costing Page 15 .  each cost element should be identifiable with a significant level of activity or major item of equipment or software. the analyst may wish to examine in considerable detail the operator manpower cost whilst only roughly estimating the maintenance manpower contribution. through cross indexing. For example. these costs should therefore be identified within the structure. the purchaser might need to compare spares costs for each option. discounting. Cost breakdown structure (CBS) CBS is central to LCC analysis. with the management accounting procedures used in collecting costs.  for programmes with subcontractors. For example. and where the same items are procured frequently a cost database can be developed.  each cost element must be well defined so that all involved have a clear understanding of what is to be included in that element. and inflation.  the CBS should be compatible. and  the CBS should be designed to allow different levels of data within various cost categories. The CBS should be sufficiently flexible to allow cost allocation both horizontally and vertically. The cost of collecting necessary data can be considerable.  the cost breakdown should be structured in such a way as to allow analysis of specific areas. these costs should have separate cost categories to allow close control and monitoring. Its aim is to identify all the relevant cost elements and it must have well defined boundaries to avoid omission or duplication. This will allow costs to be fed directly to the LCC analysis. The following fundamental concepts are common to all applications of LCC:     cost breakdown structure. cost estimating. Whatever the complexity any CBS should have the following basic characteristics:  it must include all cost elements that are relevant to the option under consideration including internal costs. It will vary in complexity depending on the purchasing decision.

and. if costs of different grades of staff and the numbers employed delivering the service are known. Discounting refers to the application of a selected discount rate such that each future cost is adjusted to present time. all future costs must be adjusted to their present value. These are determined by one of the following methods:  Known factors or rates: are inputs to the LCC analysis which have a known accuracy. This guidance does not cover the topic in great detail as it is a procedure common to many cost appraisal methods and well understood by purchasing officers. When comparing two or more options. the time when the decision is made. Discounting reduces the impact of downstream savings and as such acts as a disincentive to improving the reliability of the product. then the Procurement Cost can be calculated. this could be used as a CER for the new purchase.  Cost estimating relationships (CERs): are derived from historical or empirical data. CERs can become very complex but.e. Care should be taken with historical data. i. For example. Sources can include experience of similar procurements in-house and in other organisations. it is often the only method available when real data is unobtainable. It is a separate concept from inflation. if the Unit Production Cost and quantity are known. As the present is the most suitable time reference.Cost Estimating Having produced a CBS. it is necessary to calculate the costs of each category. The subject is fully explained in "The Green Book: Appraisal and Evaluation in Central Government 2003".  Expert opinion: although open to debate. Target & Life-Cycle Costing Page 16 . The results produced by CERs must be treated with caution as incorrect relationships can lead to large LCC errors. For example. particularly in rapidly changing industries such as IT where can soon become out of date. the staff cost of service delivery can be calculated. This is known as ‘time preference’. the simpler the relationship the more effective the CER. people prefer to receive goods and services now rather than later. When expert opinion is used in an LCC analysis it should include the assumptions and rationale that support the opinion. a common base is necessary to ensure fair evaluation. generally. Equally. if experience had shown that for similar items the cost of Initial Spares was 20 per cent of the UPC. Discounting Discounting is a technique used to compare costs and benefits that occur in different time periods. and is based on the principle that. in general.

if the analysis is estimating the costs of two very different commodities with differing inflation rates. unless this is noted. a vendor’s proposal may already include a provision for inflation and. For example. In can arise in relation to:     Capital costs. where optimism and pessimism Target & Life-Cycle Costing Page 17 . However. it is normal practice to exclude inflation effects when undertaking LCC analysis. there is a strong possibility that an additional estimate for inflation might be included. Provided inflation for all costs is approximately equal. The risk allowance should be steadily reduced over time as the risks or their consequences are minimised through good risk management. because experience has shown that undue optimism about benefits that can be achieved in relation to risk will have a significant impact on costs. Operating costs. Inflation It is important not to confuse discounting and inflation: the Discount Rate is not the inflation rate but is the investment "premium" over and above inflation. Discount rates used by industry will vary considerably and care must be taken when comparing LCC analyses which are commercially prepared to ensure a common discount rate is used. Sensitivity The sensitivity of cost estimates to factors such as changes in volumes. one should be extremely careful to avoid double counting of the effects of inflation. Works duration. A recommended approach is to consider best and worst case scenarios.The procedure for discounting is straightforward and discount rates for government purchases are published in the Green Book. for example oil price and man-hour rates. and Under delivery of benefits. Optimism bias needs to be assessed with care. usage etc need to be considered Optimism bias Optimism bias is the demonstrated systematic tendency to be over-optimistic about key project parameters. However. Risk assessment Cost estimates are made up of the base estimate (the estimated cost without any risk allowance built in) and a risk allowance (the estimated consequential cost if the key risks materialise). then inflation would have to be considered.

marketing. When non-production costs are significant. identifying these costs by product is essential for target pricing.by-product basis.can be balanced out. distribution and customer service are locked in at the R&D and design stages. However. design. Life cycle costing facilitates value engineering at the design stage before costs are locked in.  The development period for R&D and design is long and costly. When a high percentage of total life-cycle costs are incurred before any production begins and before any revenues are received. and customer service would be even higher. distribution. The probability of these scenarios actually happening is assessed and the expected expenditure adjusted accordingly. This is important information for deciding whether the company should commence costly R&D and design activities. marketing. and cost management. Step 2-Focus on the technical features by way of the economic consequences to look for alternative solutions. it is crucial for the company to have as accurate a set of revenue and cost predictions for the product as possible. Features of Life Cycle Costing  It includes Non-production Costs. value engineering. A life-cycle revenue and cost budget prevents these causal relationships among business function costs from being overlooked in decision making.  Many of the costs predicted to be incurred over several years in production. distribution and customer service are less visible on a product. If the product fails to meet promised quality-performance levels. the costs of marketing. Target & Life-Cycle Costing Page 18 . Production costs are often visible by product in most accounting systems. costs associated with R&D. WHAT GOES INTO LCC? LCC includes every cost that is appropriate and appropriateness changes with each specific case which is tailored to fit the situation. 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. Non-production costs are large. target costing.

etc. etc. evaluating the LCC and conducting sensitivity analysis to identify cost drivers. Step 9-Test alternatives for high cost items such as what happens if maintenance cost is ±10% than planned. Product life-cycle costing is a way to enhance the control of manufacturing costs. Hence. you must sustain the acquisition. Step 6-Assemble the yearly cost profiles. marketing. simple discrete. Acquisition and sustaining costs are found by gathering the correct inputs. simple with some variability for repairs and replacements. R&D. Target & Life-Cycle Costing Page 19 . building the input database. sales level. Step 10-Study uncertainty/risk of errors or /alternatives for high cost items as a sanity check and provide feedback to the LCC studies in iterative fashion Step 11-Select the preferred course of action and plan to defend the decisions with graphics Acquisition and sustaining costs are not mutually exclusive. as does the potential profitability of a product. design of products. It is critical to control costs in the development stage of a product even though much of the product costs are not actually incurred until later. Step 7-For key issues prepare breakeven charts to simplify the details into time and money. complex with random variations. production. The thrust of product life-cycle costing is the distribution of costs among categories changes over the life of the product. Product Life-Cycle Products and services typically pass through a series of distinct phases which is termed as the product life-cycle. and profit over the period from new idea generation to the deletion of a product from the product range. Step 4-Select the appropriate cost model. it is important to track and measure costs during each stage of a product’s life-cycle. If you acquire equipment. distribution and after sales service. required by project complexity. In the traditional cost accounting system. and you can’t sustain without someone having acquired the item. Step 5-Acquire the cost details.Step 3-Develop the cost details by year considering memory joggers for cost structures. revenue. Product life cycle is the pattern of expenditure. Step 8-Sort the big cost items into a Pareto distribution to reconsider further study. It is known that the majority of products are determined at an early stage of the product life-cycle.

so they can design and adjust accordingly. feedback on the effectiveness of life-cycle planning and cost data to clarify the economic impact of alternatives chosen in the design engineering phase etc. These costs are then divided by the total number of expected units to be sold throughout the lifetime of the product to come to a total cost per unit.e. which in turn facilitates the analysis of parts of the whole where cost effectiveness might be improved. Depending upon scientific management needs varying levels of detailed information may be captured by Management’s Accountants for selected phases of life cycle. In order to use life-cycle costing to its fullest. life-cycle costing cannot be used for financial reporting and in and of itself is not consistent with generally accepted accounting principles (GAAP). Phases in Product Life-Cycle: There are four distinct phases in the life-cycle of a product as shown in the figure Target & Life-Cycle Costing Page 20 . life-cycle costing is perhaps the best form of costing from a planning standpoint. Life-Cycle Costing Procedures In its standard form. cost analysis is usually conducted at the end of the life-cycle(i. until the product is no longer made. production stage) when not much can be done to change the cost structure. This process can help product managers to get a realistic view of the total cost of a product.however. and is a great tool that can be used by product managers throughout the life-cycle of a product. costs must be calculated from the point of the initial idea for the product. The major benefit of adopting product life cycle costing is that it provides an overall framework for considering total incremental costs over the entire life span of a product. However. Product life-cycle costing approach is used to provide a long term picture of the product line profitability.

 Difficulties in building up effective distribution. The product is put on the market and its awareness and acceptance are minimal. Target & Life-Cycle Costing Page 21 . Sales of new products usually rise slowly at first.g. The introductory stage may last from few months to a year for consumer goods and generally longer for industrial products. Depending upon the degree of product newness. Promotional costs will be high. retarding factors are as follows:  A small number of innovative customers most cannot afford the new product e. sales revenue low and profits probably negative. Introduction Phase . Profits are negative or low despite little competition so far.1. and heavy promotional investments incurred to stimulate growth. The skill that is exhibited in testing and launching the product will rank high in the phase as critical factor in securing success and initial market acceptance. the prices of first colour TV sets and electronic calculators were very high.  Production capacity is limited.Research and engineering skill leads to product development.  Customers prefer the security of tried brands. This is owing to high unit costs resulting from low output rates.  Technical problems of assuring product quality and reliability characterize the introductory stage.

2.  Product improvements take place. growth usually accelerates at some point. The causes of the declining percentage growth rate are the market saturation. Following the consumer acceptance in the launch phase it now becomes vital or secure wholesaler/ retailer support. Target & Life-Cycle Costing Page 22 .The acceleration results from the following 4 factors:  The larger pools of imitators or conventional consumers begin to follow the lead of the innovators. In addition there were no new distribution channels to fill.  The market is broadened by market segmentation. the product will start to make a profit contribution. If the product is successful. This is usually the longest stage in the cycle.  The number of distributors increase and the consequent filling up of the distribution pipelines cause an exaggerated jump in factory sales. But to sustain growth. Profit margins peak during this stage as ‘experience curve’ effects lower unit costs and promotion costs are spread over a larger volume. Maturity Phase – This stage begins after sales cease to rise exponentially. product penetrates into the market and sales will increase because of the cumulative effects of introductory promotion. often catching the innovator by surprise. Profits decline in this stage because of the following reasons :  The increasing number of competitive products. 3. and most existing products are in this stage. product differentiation and higher levels of promotion as competitors increasingly seek to jump on the ‘bandwagon’. Growth Phase – In the growth phase.  The innovators find market leadership under growing pressure.  Potential cost economies are used up. The period over which sales are maintained depends upon the firm’s ability to stretch the cycle by means of market segmentation and finding new uses for it. distribution.eventually most potential customers have tried the product and sales settle at the a rate governed by population growth and the replacement rate of satisfied buyers. Since costs will be lower than in the earlier phase. consumer satisfaction must be ensured at this stage.

Target & Life-Cycle Costing Page 23 . who remain last of the unsuccessful competing brands.  Exogenous cost factors will reduce profitability until it reaches zero at which point the product’s life is commercially complete. Cost control is especially important in the period of decline in order that the product may be deleted before it begins to incur losses. Decline Phase . There are a number of factors that need to be managed in order to maximize return on a product.Eventually most products and brands enter a period of declining sales. at least within a particular life cycle stage. 4. This may be caused by the following factors:  Technical advances leading to project substitution. There is no improvement in the product but changes in selling effort are common. will probably withdraw from the market. Prices begin to soften as smaller competitors struggle to obtain market share in an increasingly saturated market.  Better decisions should follow from a more accurate and realistic assessment of revenues and costs. Availability of better and less costly substitutes in the market accounts for the arrival of this phase. For this reason sales are likely to continue to rise while the customers for the withdrawn brands are mopped up by the survivors. Sales growth continues but at a diminishing rate because of the diminishing number of potential customers. Benefits of Product Life-Cycle Costing  The product life cycle costing results in earlier actions to generate revenue or to lower costs than otherwise might be considered. Profit margin slip despite rising sales. Sales begin to diminish absolutely as the customers begin to tire of the product and the product is gradually edged out by better products or substitutes. In this place there will be stable prices and profits and the emergence of competitors.  Fashion and changing tastes.

profitability and sales level of a product. It is the way of portraying the cash flow. Product life cycle thinking can promote long-term rewarding in contrast to short-term profitability rewarding. price variations and so on in isolation.  It makes relatively easy for management to recognize the profit implications of design changes. which in turn facilitates analysis of parts of the whole where cost effectiveness might be improved. product obsolescence.  It provides an overall framework for considering total incremental costs over the entire life span of a product.  Life-cycle costing and value engineering is also used for the management of environmental costs. Target & Life-Cycle Costing Page 24 . for a particular product.

Managing Director GROUP HISTORY The beginnings were humble . built enduring business bonds with a vast dealer network in India and abroad. they Target & Life-Cycle Costing Page 25 . Onkar Singh Pahwa . 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. AVON has remained in the top performers’ position for over half a century. altogether. Avon Cycles came into being in 1952 when the first batch of 250 bicycles rolled out of its plant. including Steel Balls needed for their Bicycles. these being in a different discipline. 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 have facilities for making almost all the parts. ever since. The numbers have been going up. Excellent quality. consistent quality and effective after-sales service made up a perfect proposition. the Pahwas set out on a long and arduous journey. From amongst the pioneers of the Indian bicycle industry. the Pahwas set out on a long and arduous journey.Analysis of Implementation of Target and Life-Cycle Costing at AVON CYCLES AVON CYCLES INDUSTRIES Company Profile ESTABLISHED: 1952 CONTACT PERSON:Mr. High-class technology. economical price and ethical business dealings earned them instant acceptability. To meet their expanding requirement of raw materials. AVON is the only group anywhere in the world with full backward integration. The promoters’ abiding faith in human values and fairness.classic example of the enterprising Punjabi spirit. Avon Cycles came into being in 1952 when the first batch of 250 bicycles rolled out of its plant. This places them a cut above the rest when we talk of quality born of work culture. Starting up a bicycle saddles and brakes manufacturing unit in 1948. They did not venture into Tyre and Tubes.

T.000 square meters site in the ‘cycle capital of India’. achieving full backward integration. a buzzing industrial city in the northern state of Punjab. Their happiness is the key to its growth. Road and Air. The highly motivated work force carries a sense of belonging. The family business was reorganised in 1997 and the flagship company is the subject of this profile. they support two modern hospitals looking after the poor and the less fortunate of our brethren. Sohan Lal Pahwa is the Chairman. Some of the workers joined the Target & Life-Cycle Costing Page 26 . The former inspires trust. Placed on an 85.added facilities for making Steel Strips. Vice Presidents and General Managers heading various functions. Technological innovation has been one of the most natural advantages of its organisational structure. Road at Ludhiana. Onkar Singh Pahwa leads the team as Managing Director. ‘APSARA’ and ‘BUKE’ have become synonymous with dependable quality at competitive price. it has invested heavily in its human capital. BRAND EQUITY Years of trust building has earned AVON the status of a household name. By way of thanksgiving for its prosperity. and the latter confidence in its ability to perform continually and consistently. make it possible. PRESENT ORGANISATION Sh. The organisation combines the simplicity and speed of a family business and the broad-based features of corporate functioning. unmatched and unequalled anywhere else. the company is committed to delivering quality at affordable price. In fifty-two years of its being. AVON is a truly integrated bicycle manufacturer rolling out an impressive 1. His two sons serve as full time working directors. The city is well connected with other major cities and ports by Rail. LOCATION The Company’s Head Office and manufacturing units are conveniently located on the G. VISION As a manufacturing company. the Group occupies a unique position in the industry. has Purchases and Works under him and the younger Mandeep Pahwa looks after Sales and Finance. The national capital Delhi is 300 KM away. There is hierarchy of senior Vice Presidents. ‘AVON’. Mr. The elder Rishi Pahwa. Today.5 million true born machines per annum: most modern plants and machinery systems. Steel Tubes and Hot Rolled Steel. comparable to the best in the world.

They developed a product that satisfies needs of customers( girls in this case). After the design of the product the company provides a picture of the model or sometimes also a sample of the bicycle to the respective retailers or dealers to know the demand of the particular model in the market and accordingly the company produces the no of bicycles.) per each bicycle of this sold of this particular model i.e. 15 Rs. They expected to make target operating income of Rs. After comparing the data provided by them and theoretical aspects of target and life-cycle costing i concluded that they use 4 steps in implementing their costing system.company in their youth and now. marketing costs. Mr. Four main steps are: 1. Also it includes redesigning which is basically making the appearance more stylish or using brighter colors. distribution costs. 2. their second generation is growing with it to be old enough to bequeath their trust to the generation next. paints etc. Deepwant Pahwa (E. around 18% of the target price.) helped me in providing various cost details related to the manufacturing of their company’s product MISS INDIA (lady’s bicycle). 20 Page 27 . production costs (special machinery only for this model). 1500 Rs. They launched this model (MISS INDIA) of bicycle after the launch of a same kind of model by Hero Cycles. 3.400 = Rs. Target cost per bicycle = 2200 . 400 (approx. dyes.D. They have grown with the company. and costs of the defects which are to be reworked. can be used to make other models also. 1800 4. They choose a Target price well below that of Hero Cycles whose prices were somewhere around 2300 to 2350 as compared to their target price of around 2200. Break up of the Target cost of the Bicycle (Beautiful Magic) as given by the official is: Raw Material Labour Electricity Expenses Target & Life-Cycle Costing Rs. The advantage in bicycle industry is that same raw material. They achieve this target price by performing value engineering and also by implementing the product life-cycle costing which takes into account design costs.

1800 All costs are approximated as told by the official. design cost and production cost which is about 15% of the overhead cost. Target & Life-Cycle Costing Page 28 . Overheads includes bank interest (Rs. life cycle cost i. 30 (Delivery Cost) Rs. gift items for the good dealers like key chains.e. Rs 30 is for near by places like Mohali. of bicycles) to be sold as in bicycle industry demand drives the production of the product. 30 (Marketing Cost) Rs. 120 and for places to the farther south it can go upto Rs. suitcases. pens. Analyzing the data and how the company implements the Target and Life-cycle Costing in their costing of this particular bicycle model it can be seen that there is not much deviation from the theoretical concept except for the variation in setting the sales target (no. 30 Rs. 30). 60 to 80 and for Maharashtra it can go upto Rs. watches etc. Panchkula. 75). 25 Rs. 150 Rs. *recovery of payment (Rs.Overheads Transportation Cost Administration expenses Advertisement Cost Paint cost Total Cost Rs. For other states of Harayana it is around Rs. 250. Delivery cost is variable.

Lafarge has an established presence across all major cities and towns in India.  A multilocal organization: Lafarge's goals are local but remain integrated into our global approach. This acquisition was followed by the purchase of the Raymond Cement facility in 2001. Lafarge through its specialist solutions under . Delivering continuous performance improvement: Lafarge continually strives to optimize its products and services. with its leading brands . The group responds to the needs driven by its customers.The Lafarge Way is built around 3 concepts- Making our employees successful: Lafarge aims to enable each individual to succeed.Analysis of Implementation of Target and Life-Cycle Costing at Lafarge India Pvt. Ltd. Ltd. Target & Life-Cycle Costing Page 29 . with the acquisition of Tata Steel's cement activity. Vision & values      The undisputed leader in building materials Upholding commitments to all stakeholders The Lafarge Way.Cement. business associates. Lafarge India Pvt. World leader in building materials.Lafarge's total cement production capacity in the Indian market currently stands at around 7 million tons and the Group has launched an ambitious program to more than double its capacity in the next five years. The company currently has four cement plants in India: two integrated cement plants in the state of Chhattisgarh (Sonadih and Arasmeta) and Grinding Units in Jharkhand (Jojobera) and West Bengal (Mejia). Lafarge the world's largest cement manufacturer entered the Indian market in 1999 through its cement business. Aggregates & Concrete and Gypsum enable and empowers its customers by bringing innovation & sustainability to their construction. shareholders.Concreto and Duraguard. regional authorties and local communities. Lafarge is one of the leading players in the cement industry in Eastern and Central India.

Direct material.73 Percentage* 53. direct labor. Costs associated with the cement product Direct cost. Marketing. depreciation of plant of machinery /vehicles/buildings/computers/furniture Particulars Sales Less: VAT @ 13.43 185. Packaging. Indirect costs.6828 31.TARGET COSTING AT LAFARGE INDIA PVT.69% 5.69% 2.5% Less: Excise duty @ 10% Less: excise duty @ Rs.93% Page 30 .16 46.216 8 0.62432 0.31216 232.selling & distribution etc) Target & Life-Cycle Costing Per Unit* 100 5 5 11 50 14.73 Percentage 100% 20% 80% Break-up of Target Cost Particulars Raw Material Clinker Gypsum Fly ash Labour Transportation cost Other Overheads(electricity. Direct Supervisory costs. Telephones.84% 2.92% 7.92% 26. Administrative costs. Electricity. LTD.Advertisements.8/unit Less: Educational cess @ 2% Less: SH edu cess @ 1% Sales (net off taxes) Less:operating profit margin Target cost Statement of Target Cost Per Unit 300 35.

After assessing the factor of production and capability target price for Lafarge cement was fixed at Rs. Target & Life-Cycle Costing Page 31 . limited implements Target Costing but Life Cycle Costing Implementation is not as explicit as per theory. The target price is set depending primarily on the competitors offering . 305. Analysis of Target costing and Life cycle Costing at Lafarge India Pvt. Per Unit* Raw Material 14.73 Clinker 50 100 11 5 5 Gypsum Fly ash After analyzing the costing undertaken at Lafarge India Pvt. Customer response was studied from collecting data from registration authority and market research. 295 and Ambuja cement which is priced at Rs.For their cement product . the main competitor was ACC cement which is priced at Rs. limited and the theoretical concepts of Target Costing and Lifecycle Costing it can be said that although Lafarge India Pvt. Since it was manufactured to give better strength and quality performance it could be priced higher than the competitor. 300.73 100% *These values are approximate as the values told by the official were in approximate percentage in order to maintain confidentiality of the data.Target cost 185. Limited 1.

For example in order to lower down the cost a low grade clinker can be chosen. Cost Reduction initiatives are undertaken performing value engineering and also by implementing the product life-cycle costing which takes into account R&D cost. 4. production costs. But this cannot be done indiscriminately as quality is the selling point for Lafarge cement. and costs of the defects which are to be reworked. Target & Life-Cycle Costing Page 32 . distribution costs. A profit margin of around Rs 30 is set on Lafarge cement as per the business policies. 3. Depending on this set Target Cost . Target Cost is achieved after subtracting the Profit margin and Taxes from the Target Price. Major cost reduction initiatives are undertaken in the production stage. This is because Lafarge limited being a new player capacity in the market thrives on large profit margins whereas ACC Limited already established can thrive on small profit margin. ACC cement charged a profit margin of only Rs 20 per bag.2. design costs. At Lafarge India limited R&D and Design cost form a meagre part of the cost as they do not indulge into a product that requires a major change in the production line. marketing costs.

Our main aim is to explore new ways to improve products and offer an exciting range of products that will enhance your live simultaneously anticipate your needs. At Philips. Stimulated by the industrial revolution in Europe. Philips’ first research laboratory started introducing its first innovations in the xray and radio technology. had become one of the largest producers in Europe.000-trademark registration and 6. the list of inventions has only been growing to include many breakthroughs that have continued to enrich people’s everyday lives. Visit our Green Lighting section.000 rights 22. processes and services. By our commitment in Philips Lighting. the Netherlands. now a ISO 9001:2000 Company Target & Life-Cycle Costing Page 33 . OVERVIEW  Incorporated in 1983  Product Quality Certification by Bureau of standards in 1987  Awarded ISO-9002 Certification from British Standards Institute in 1994.000 design registrations. we strive to introduce meaningful products and technologies for our customers and end users. in Eindhoven. For 30 years. IN PHILIPS. As we recognize our responsibilities and we care about the environment too. we continually work towards enhancing environmentally safe products. Over the years. The company begun manufacturing carbon-filament lamps and by the turn of the century. Philips currently holds about 75. we hope to make a real difference in your lives.Analysis of Implementation of Target and Life-Cycle Costing at Philips India Limited COMPANY PROFILE : The foundations of Philips were laid in 1891 when Anton and Gerard Philips established Philips & Co. we recognize that the products we make and the service we provide no affect the people’s who use them and the environment. if you wish to find out more. At the forefront of technology. Below are some of the important market introductions of recent years.

G. Holland.S. However. It has now become the largest lamp manufacturing Factory in India with an installed capacity of 170m and 55m.C.D) in 1996  First Lamp Factory to win PQA-90 Award in 1999  First Lamp Factory in India to win PBE Bronze for Business Excellence  Installed Capacity 170 Million Incandescent .VTL and CFL units. The lamp manufacturing activities at PALI was commenced in the year 1985 with two GLS (a group) units and one TL head mechanized unit. Fluorescent Lamps and 47M of tubular glass shell per annum respectively Target & Life-Cycle Costing Page 34 . a town situated near Chandigarh by koninklijke Philips electronics N.V. Starting with the production of one wattage of incandescent clear lamps and slim line fluorescent(TLD) lamps.Talwar (M. tubular glass shell unit was commissioned in Dec’99.In order to further consolidate its market leader position and production target new high speed B-group GLS chain has been commissioned. Over the year Phillips has increased its stake and PALI has become a majority share holding (4%) company of Phillips. a state of the art technology. the plant has added additional GLS . lamps Phillips India limited”. 67 million fluorescent Lamps & 47 million of tubular glass shells per annum  Parag Mahajani’s Best Performance Award  Golden Peacock Award for Excellence In Corporate Social Responsibility  ICC Award 2008 for P.As part of backward integration of manufacturing business. Declared champion of APR BG Lamps Factories for the year 1995  Philips Quality Leadership Award to Mr. over years the Philips has increased its stake and PALI has become a majority share holding company of Philips .The company is managed by a team of managers headed by the managing director who reports administratively to the board of directors and functionally to vice president “B.A Stadium Lighting  Silver And Bronze for Industrial Design Excellence Award by NGO for a Low Smoke Biomass Stove CURRENT ACTIVITIES IN ORGANISATION Philips India Limited was incorporated in 1983 as a joint venture company in Mohali. Anand group of industries and Punjab state industrial development corporation.

Philips developed a product that satisfies needs of customers.170 millions. rather it was Rs.with strength of over 1000 employees.e.. distribution costs. They achieve this target price by performing value engineering and also by implementing the product life-cycle costing which takes into account design costs.Surya.25% of the target price.55 Millions GLS :. 15 months as compared to Havells which gave a warranty of only 12 months to the consumers. 2. 3.5w CFL bulb in this case as it was more efficient than incandescent bulbs and also trying to compete with the various other big manufacturers like Havells India.etc.i. Also in addition to this a new plant is coming up in the mohali plant which is based on the laser technology as it will help in easy cutting and moulding of glass used in the manufacturing of the CFL.58 = Rs. At present the approximate production figure for different products is as given per annum basis:    VTL :. There are plans to further augment the installed capacities to 243 m of GLS and 67 m TL lamps in the current year. Alongwith this it will also help in cutting the high electricity costs involved in semi automatic machines and also reducing the expenses on LPG as it was the Target & Life-Cycle Costing Page 35 . But they started giving a long warranty. production costs (special machinery only for this model).18 (approx. 17 .e.2 higher than Havells. 16 . marketing costs.) per piece of the CFL sold of this particular wattage i. Target cost per unit CFL = 75 . overall productivity and consequently asset utilization at PALI have consistently been improving and now compare favorably with the best in class. 4. They expected to make target operating income of Rs. Also it includes redesigning which is basically making the appearance more stylish. and costs of the defects which are to be reworked. around 20 .In order to consolidate its market leader position and production target new high speed B Group GLS chain has been commissioned with CFL’s one unit in order to meet customer’s need and requirement .ie. fall-off Rates. Four main steps involved for target costing are: 1.47 Millions CFL :. They choose a Target price similar to their competitor Havells India. The total operation efficiencies.

COMPANY’S VARIABLE COST Variable Cost = delivery cost+ consumer service cost. Telephone & other Bills + Overheads. NET PROFIT =Gross Profit – Indirect cost.major source for moulding of the glass in the company due to its environment friendly nature. Analysis of cost for manufacturing 5W CFL in Philips : COMPANY’S FIXED COST Fixed Cost = employee’s Salary + Rent+ Electricity. INDIRECT EXPENDITURE Delivery cost+ consumer service cost. The main reason why the CFL of Philips captured a bigger sector than Havells inspite of a Rs. but soon Havells also increased its warranty time period.2 higher MRP was due to the fact that the intensity of light was 250 lumens in case of Philips as compared to the 240 lumens in case of havells. Still the sales were high due to high output intensity of the bulb. Also they gave a 3 month longer warranty than Havells. DIRECT EXPENDITUTRE R and D cost + Labour of each employee + Other Expenditure. Analysis of target cost of Philips India of a 5w CFL bulb : Statement of Target Cost Particulars Sales Less: Taxes (Excise+Education cess+Higher education Tax) 10 Per Unit 85 Percentage Target & Life-Cycle Costing Page 36 . GROSS PROFIT =Gross Turnover – Direct Cost.

Selling and Distribution overhead) Target Cost 13 58 22.66% 77.Glass -Calcium & Phosphate powder -LPG -argon gas cylinders -Tungsten and Molybdenum wires Labour Transportation Cost Other Overheads(Electricity. Target & Life-Cycle Costing Page 37 .Sales (net of taxes) Less: Operating profit margin Target Cost 75 17 58 100% 22.9% *These values are approximate as the values told by the official were in approximate percentage in order to maintain confidentiality of the data.1% Unit* 33 Percentage* 56.96% 5. LPG.4% 100% 11 3 18.34% Break-up of Target Cost Per Particulars Raw Material .

By this way company finds the actual cost of manufacturing the CFL. 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. Distribution cost includes the cost of delivering and installing all the required software at the clients end. The design cost gives the idea of the designing of the blue print of the CFL and it is consumed mainly in graphical design of the project. Target & Life-Cycle Costing Page 38 .raw material transportation cost labour other overheads After analyzing the costing undertaken at Philips and the theoretical concepts of Target Costing and Lifecycle Costing it can be said that although Philips implements Target Costing but Life Cycle Costing Implementation is not as explicit as per theory.

The technology partners provide technical support. Technology Partners Quark’s philosophy of engaging in a Technology partnership is to leverage the technical expertise of partner to build world-class solutions. Vision Quark's vision is to continuously innovate in desktop publishing. in 1981. faster. and help small and mid-sized businesses promote themselves easily. Target & Life-Cycle Costing Page 39 . and affordably. Mission We are dedicated to developing design and publishing software that helps clients of all sizes deliver a superior experience to their customers while meeting on-going demands to do so better. small and mid-sized businesses. Colorado. lead the dynamic publishing market. or large organizations. The vision was to create software that would lay the foundation for modern publishing. and cost-effectively. training & latest tools to enable Quark applications become best in breed and world-class. providing customers with one stop shop solution and reducing the total cost of ownership.Analysis of Implementation of Target and Life-Cycle Costing at Quark About Quark Founded in Denver. whether professional designers. Quark was named after the subatomic particle proposed as the building block for all matter. professionally. Quark has delivered on its mission to be a leading provider of publishing software and solutions for customers of all sizes. For 30 years. Quark has engaged itself in various go to market programs with technology partners.

BAKER & TAYLOR 6.Some of the technology partners of Quark are:1. BLIO 7. ASTORIA 5. ALFRESCO 2. PICTURESAFE Strategic Partner 1) Microsoft 2) IBM 3) Designed for EMC Target & Life-Cycle Costing Page 40 . NEWSGATAR 8. ALTOVA 3. AQUAFADAS 4.

Global Publishing Software Products Free Open Source Scribus Passepartout Lyx Fatpaint Proprietary Adobe Indesign Adobe Pagemaker QuarkXpress Framemaker Greenstreet Microsoft publisher Microsoft word 2009 IStudio publisher Prince XML Print shop Ovation Pagestream Ragtime Serif page plus Ventura publisher Ultra XML Inpage Interleaf Prefis Bookmachine Target & Life-Cycle Costing Page 41 .

and more. delivering precision typography. editors. layout. and more than three million QuarkXPress users worldwide are benefiting from a new generation of rich design capabilities for print. localized advertisements. Features of QuarkXpress  Easy to use  Powerful design tool  Precision typography  Layout automation  Reliable print output  Collaboration  Integration with other application VALUE CHAIN R & D of the Software Distribution of different modules in the team Development of one module per team Assembling of the all finished modules to get the desired software Software testing . The 2001 release of QuarkXPress Server ushered in a high-performance publishing engine that fused automation with professional design. Web.in 1987. and interactive media. design-rich database publishing. QuarkXPress quickly became the world's most widely used professional page-layout software. writers. and other contributors to the publishing process through collaborative workflows. personalized direct mail. and color control to the desktop computer to change the way people publish around the world. More than five billion pages have been produced using QuarkXPress. QuarkXPress 3 had become the software of choice for publishers worldwide. By 1990. introducing client/server-based publishing software to connect designers.About QuarkXpress Quark introduced its flagship software -QuarkXPress . With the 1997 release of QuarkXPress 4. Quark expanded on its publishing foundation in 1992 with Quark Publishing System. on-demand custom sales literature. helping organizations produce compelling communications across the Web and in automated publishing processes to produce high-impact catalogs.

COMPANY’S FIXED COST Fixed Cost = employee’s Salary + Rent+ Electricity. DIRECT EXPENDITUTRE R and D cost + Labor of each employee + Maintenance Cost + Wages + Other Expenditure. By this way company finds the actual cost of the software. COMPANY’S VARIABLE COST Variable Cost = delivery and installation cost+ consumer service cost. Distribution cost includes the cost of delivering and installing all the required software at the clients end.00. Telephone & other Bills + Overheads. The design cost gives the idea of the designing of the software and it is consumed mainly in graphical design of the project. NET PROFIT =Gross Profit – Indirect cost.00.Delivery to client and installation Maintenance for the required period COSTING CONTROL Total Cost = R&D Cost + Design Cost of Product + Distribution Cost + Customer Service Cost The R and D cost includes the researches done to develop the helping soft wares and the major chunk of it is consumed by the salaries of the technical leads in the project. 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.000 Target & Life-Cycle Costing Page 43 . INDIRECT EXPENDITURE Delivery and installation cost+ consumer service cost.000 1lkh Rs 40. Software package of QuarkXpress Selling Price of the software (P) Sales quantity in units (Q) Target revenue (P*Q) Rs 4. GROSS PROFIT =Gross Turnover – Direct Cost.

20.00.000 Total Life-cycle incurred Cost Rs 16.00.Life Cycle Costs R & D Cost Design Cost of Product Marketing cost Distribution Cost Customer Service Cost Packaging cost Rs 8.23.34.000 Life cycle Operational Income Rs 23.00.79.85.72.00.28.000 Rs 3.000 Rs 3.87.76.000 Rs 41.000 26.000 Rs 19.000 Target & Life-Cycle Costing Page 44 .

Strategy:Hero MotoCorp's key strategies are to build a robust product portfolio across categories. In 2001. ( PREVIOUSLY HERO HONDA) We collected this data from the gurgaon manufacturing plant of Hero Motors Corp. styling and quality so that it converts its customers into its brand advocates. We did not get the exact or official data for our project because of the security concerns of the company . The company will provide an engaging environment for its people to perform to their true potential.. explore growth opportunities globally. reflects its commitment towards providing world class mobility solutions with renewed focus on expanding company's footprint in the global arena. based in India. (Formerly Hero Honda Motors Ltd. the 'World No.ANALYSIS OF IMPLEMENTATION OF TARGET AND LIFE CYCLE COSTING AT HERO MOTORS LTD. continues to maintain this position till date. Hero MotoCorp Ltd. continuously improve its operational efficiency. powered by its bikes.the vision of a mobile and an empowered India. the company achieved the coveted position of being the largest two-wheeler manufacturing company in India and also. This is done to show how the life cycle costing is done by using approximated values of the fields required. Mission:Hero MotoCorp's mission is to become a global enterprise fulfilling its customers' needs and aspirations for mobility.) is the world's largest manufacturer of two wheelers. Hero MotoCorp Ltd. company's new identity. setting benchmarks in technology. History:The story of Hero Honda began with a simple vision . And so the data given in this report is approximated and not exact.1' two-wheeler company in terms of unit volume sales in a calendar year. aggressively expand Target & Life-Cycle Costing Page 45 . It will continue its focus on value creation and enduring relationships with its partners. About the company:Hero MotoCorp Ltd.

utilizing every opportunity and leveraging its strong presence across sports.its reach to customers. Distribution:The Company's growth in the two wheeler market in India is the result of an intrinsic ability to increase reach in new geographies and growth markets. Life Cycle Costing:Now the working cycle or life cycle of a splendor bike is 10. in the hill state of Uttrakhand. Building and promoting new brand identity will be central to all its initiatives. Life Cycle Cost = Initial cost at which the product is bought + maintenance cost of its life Cycle – Disposal cost Target & Life-Cycle Costing Page 46 . continue to invest in brand building activities and ensure customer and shareholder delight. Manufacturing:Hero MotoCorp two wheelers are manufactured across three globally benchmarked manufacturing facilities. entertainment and ground.level activation.000 working hours for 10 years. and dealer-appointed outlets across the country. Two of these are based at Gurgaon and Dharuhera which are located in the state of Haryana in northern India. Now hero Honda splendour is an established brand in the Indian market. The third and the latest manufacturing plant is based at Haridwar. Also is has come out with a number of models of splendor bikes to maintain its presence in the market and also the freshness in the bike. service & spare parts outlets. It is a well known bike and also been awarded “ Bike of the year”. Company's new identity "Hero MotoCorp Ltd." is truly reflective of its vision to strengthen focus on mobility and technology and creating global footprint. Brand:The new Hero is rising and is poised to shine on the global arena. Hero MotoCorp's extensive sales and service network now spans over to 5000 customer touch points. These comprise a mix of authorized dealerships.

400 Now . their wear and tear increases and so it reaches upto even 9%.000 Marketing cost = Rs 2. So we take an average of these costs and make it equal to 5% each for simple calculation.Now we will calculate the other major costs incurred by the company in making one unit of bike:R&D cost:. And so we take the cost at 3% of the cost. Target & Life-Cycle Costing Page 47 . Maintenance cost in the final years is high. Maintenance cost is less during initial years because the bike is new and has newly made parts which do not break down easily.Rs 5500 Production cost = Rs 30.000 Distribution cost = Rs 2. So the total life-cycle cost of bike for the company is = Rs 39. as the parts become old. Disposal cost is almost 10% of initial cost.900 And the total life cycle cost of bike for the owner of the bikes can be calculated by using the above formula.