Professional Documents
Culture Documents
Presented By
Saurabh Thadani[10FN-102]
Srikanth Konduri[10FN-109]
Srivatsan Rangarajan[10FN-110]
Tushar Gupta[10FN-115]
Varun Joshi[10FN-117]
Nikhil Gupta[10FN-121]
Target Costing
Table of Contents
1. A Historical Perspective:................................................................................................... 3
1.1 The Origin of Target Costing.................................................................................3
1.2 The Ford mistake and the importance of target costing......................................3
2. Definition:................................................................................................................. 4
2.1 Target costing v/s Traditional costing...................................................................4
2.2 Target costing principles...................................................................................... 5
2.3 Target Costing Objectives.................................................................................... 5
3. Approaches to target based costing:........................................................................5
3.1 Price based targeting........................................................................................... 5
3.2 Cost based targeting............................................................................................ 5
3.3 Value based targeting.......................................................................................... 6
4. Target costing Implementation:.................................................................................6
4.1 The Process of Implementation - Target Costing into a New Product...................6
4.1.1 Establishing a Selling Price for the Product....................................................7
4.1.2 Establishing a Target Profit for the Product....................................................7
4.1.3 Determine the Target Cost............................................................................. 7
4.1.4 Perform Functional Cost Analysis and/or Value Engineering..........................7
4.1.5 Determine the Cost Estimate.........................................................................7
4.1.6 Decision: is the Cost Estimate on Target?......................................................8
4.1.7 Make the Final Decision................................................................................. 8
5. Benefits of target based costing:..............................................................................8
6. Disadvantages of target based costing:....................................................................8
7. TOYOTA Implementation - Introduction:....................................................................9
7.1 Toyotas target costing process............................................................................9
7.2 Target Costing in the Design Stage......................................................................9
7.3 Data required..................................................................................................... 11
7.4 Reason that Toyota excels in target costing.......................................................11
8. Example Case Target Costing for SMARTCOM Modems.........................................12
8.1 Findings of Market Research:.............................................................................12
8.2 Findings of Market Research:.............................................................................12
8.3 Quality Function Deployment for customer priority & feature correlation:........13
8.4 Value quantification for the Component contributing to a feature:....................14
8.5 Actions Required:............................................................................................... 14
9. Ways to achieve the Target Costs using Value Engineering/Innovation...................15
10. Conclusion............................................................................................................. 16
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Target Costing
10.1 Marketing costs................................................................................................ 16
10.2 Installation costs.............................................................................................. 16
11. Key Learnings........................................................................................................ 16
12. Bibliography.......................................................................................................... 16
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1. A Historical Perspective:
1.1 The Origin of Target Costing
Target costing originated in Japan in the 1960s, though it remained a secret for years. The first use of value engineering in Japan
known as genka kikakuoccurred at Toyota in 1963, though it wasnt mentioned in Japanese literature until 1978 (Tani et al.,
Target Costing
1996). Later genka kikaku was translated into target costing, the term now used throughout the world. At the annual meeting of
the Japan Cost Society in 1995, 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.
2. Definition:
In essence, it is a philosophy in which product development is based on what the market will pay for it, not on what it has cost to
produce. In other words, market price becomes the determinant of cost and not the other way around, as is the practice with most
organisations.
Target Costing
Target costing is a strategic management tool that seeks to reduce a products cost over its lifetime. Therefore, the target cost is not
necessarily the cost to currently build the product.
Target costing presumes interaction between cost accounting and the rest of the firm; wellexecuted, long-range profit planning; and
a commitment to continuous cost reduction.
Price-Led costing
Focus on customer
Focus on design
Cross-Functional involvement
Value-Chain involvement
A life-cycle orientation
To identify the cost at which the product must be manufactured if it's to earn its target profit margin at its expected or
target selling price
Target Costing
To decompose the production process and then to set cost targets for each product element
Sets target cost for the product through comparison with that of competitors
This means setting the price of the product by observing what the market will bear, then deducting the desired profit
margin from the price, and thereby obtaining the target cost
It sets the cost 1st, then the desired profit margin is derived at the price of the product
This method requires the suppliers to reveal the very details of their cost structure and will sour the buyer-supplier
relationships so itsnt good for the long run
It sets the price by what it thinks the market will value the product
After that, the producer sets the desired profit margin and then tries all ways to keep the cost below that of the target cost
Target Costing
Focus on customers ~ value to the customer must be greater than the cost of the product itself
Target Costing
Target Costing
Product development time might be lengthen as product is repeatedly designed to bring cost below that of target.
Normalize the costs to the existing conditions: Incorporate the changes in prices due to inflation etc.
Select the price for your base product, the volumes expected to sell and the profits commanded
Identify the cost reductions that need to be made to achieve the profit targets
Allocate the cost reductions to different departments suitably
Target Costing
parts will be produced. After setting the target cost, the target costing is launched under the control of Cost Management Council (or
Target Costing Council).
In the design stage, begun after the product manager fixes his product planning, the target costing is organized so that the design
engineers draw the parts and components of this vehicle so as to meet the target cost, ensuring of course their required quality.
Following Toyota conventions, the cycle of drawing parts and production trials is repeated three times (but only one time from the
end of the 1990s) before the definitive designs that satisfy the target cost and quality criteria are fixed (this process is called value
engineering). Each time they draw the parts in this process, cost management personnel calculates the cost of the parts, in order to
verify whether or not the target cost is achieved. Then the cost realized by definitive drawing becomes the referential cost of the
product. Meanwhile, the Production Engineering Division, which conceives and prepares the production lines of parts and the final
assembly line subject to investment budget constraints, fixes the standard time for producing parts and a whole vehicle. In other
words, every production line has its own referential cost and standard time.
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Target Costing
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Target Costing
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Target Costing
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Correlations
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How (Technical Response)
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What (Customer Wants)
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Relationships
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Planning Matrix
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Technical Matrix
Below Table shows the features which mattered most for the customers and their relative priorities
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Target Costing
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Target Costing
The above table shows the actions required in terms of costing of an individual component (either to enhance/reduce or do nothing),
based on which the below changes have to be achieved:
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Target Costing
10. Conclusion
10.1 Marketing costs
Decrease number of orders processed and deliveries made by encouraging larger orders through discounts.
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Target Costing
2. Product design should incorporate the "plug and play" technology to minimize user involvement during installation and engineer
the modem so that it can automatically configure itself with the right software.
3.Design product to include self-checking and diagnostic capabilities into the modem so that the modem can automatically test itself
during operations.
12. Bibliography
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