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19421070target Costing
19421070target Costing
In preparation of my assignment of AFM I would like to show my gratitude to some respective people
who helped directly or indirectly in completion of my work.
Firstly I would like to thanks my parent for giving encouragement and invaluable assistance to me
without which it would have not been possible to complete my assignment.
Secondly I would like to show my gratitude to my AFM professor DR. LIAQAT ALI for assigning
such topic so that I could discover new ideas and build my knowledge more. By doing this assignment
I got enriched with many information which can help me in future.
CONTENT
INTRODUCTION
TARGET COSTING is a system under which a company plans in advance for the price points,
product costs, and margins that it wants to achieve for a new product. If it cannot manufacture a
product at these planned levels, then it cancels the design project entirely. With target costing, a
management team has a powerful tool for continually monitoring products from the moment they
enter the design phase and onward throughout their product life cycles. It is considered one of the
most important tools for achieving consistent profitability in a manufacturing environment
DEFINITION :- Target costing is defined as "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.
The fundamental objective of target costing is to manage the business to be profitable in a highly
competitive marketplace. In effect, target costing is a proactive cost planning, cost management,
and cost reduction practice whereby costs are planned and managed out of a product and business early
in the design and development cycle, rather than during the later stages of product development and
production.
The process of target costing can be divided into three sections: the first section involves in market-
driven target costing, which focuses on studying market conditions to identify a product’s allowable cost
in order to meet the company’s long-term profit at expected selling price; the second section involves
performing cost reduction strategies with the product designer’s effort and creativity to identify the
product-level target cost; the third section is component-level target cost which decomposes the
production cost to functional and component levels to transmit cost responsibility to suppliers
1) Market-driven target costing
Market driven target costing is the first section in the target costing process which focuses on studying
market conditions and determining the company’s profit margin in order to identify the allowable cost of
a product. Market driven costing can go through 5 steps including: establish company’s long-term sales
and profit objective; develop the mix of products; identify target selling price for each product; identify
profit margin for each product; and calculate allowable cost of each product.
Company’s long-term sales and profit objectives are developed from an extensive analysis of relevant
information relating to customers, market and products. Only realistic plans are accepted to proceed to
the next step. Product mix is designed carefully to ensure that it satisfies many customers, but also does
not contain too many products to confuse customers. Company may use simulation to explore the impact
of overall profit objective to different product mixes and determine the most feasible product mix.
Target selling price, target profit margin and allowable cost are identified for each product. Target
selling price need to consider to the expected market condition at the time launching the product.
Internal factors such as product’s functionality and profit objective, and external factors such as
company’s image or expected price of competitive products will influence target selling price.
Company’s long-term profit plan and life-cycle cost are considered when determining target profit
margin. Firms might set up target profit margin based on either actual profit margin of previous products
or target profit margin of product line. Simulation for overall group profitability can help to make sure
achieving group target. Subtracting target profit margin from target selling price results in allowable cost
for each product. Allowable cost is the cost that can spend on the product to ensure meeting profit target
if selling it at target price. It is the signal about the magnitude of cost saving that team need to achieve.
3) Engineer the product. The engineers and procurement personnel on the team now take the
leading role in creating the product. The procurement staff is particularly important if the
product has a high proportion of purchased parts; they must determine component pricing
based on the necessary quality, delivery, and quantity levels expected for the product. They
may also be involved in outsourcing parts, if this results in lower costs. The engineers must
design the product to meet the cost target, which will likely include a number of design
iterations to see which combination of revised features and design considerations results in
the lowest cost.
4) Ongoing activities. Once a product design is finalized and approved, the team is
reconstituted to include fewer designers and more industrial engineers. The team now enters
into a new phase of reducing production costs, which continues for the life of the product.
For example, cost reductions may come from waste reductions in production (known as
kaizen costing), or from planned supplier cost reductions. These ongoing cost reductions
yield enough additional gross margins for the company to further reduce the price of the
product over time, in response to increases in the level of competition.
Target costing is most applicable to companies that compete by continually issuing a stream of new
or upgraded products into the marketplace (such as consumer goods). For them, target costing is a
key survival tool. Conversely, target costing is less necessary for those companies that have a small
number of legacy products that require minimal updates, and for which long-term profitability is
more closely associated with market penetration and geographical coverage (such as soft drinks).
The target costing concept has limited application in a services business where labor comprises the
primary cost.
Target costing is an excellent tool for planning a suite of products that have high levels of
profitability. This is opposed to the much more common approach of creating a product that is based
on the engineering department’s view of what the product should be like, and then struggling with
costs that are too high in comparison to the market price.
INTRODUCTION
Toyota Motor Corporation is a Japanese multinational automotive manufacturer headquartered
in Toyota, Aichi, Japan. In 2017, Toyota's corporate structure consisted of 364,445 employees
worldwide and, as of September 2018, was the sixth-largest company in the world by revenue. As of
2017, Toyota is the largest automotive manufacturer.
Toyota was the world's first automobile manufacturer to produce more than 10 million vehicles per year
which it has done since 2012, when it also reported the production of its 200-millionth vehicle.[ As of
July 2014, Toyota was the largest listed company in Japan by market capitalization and by revenue.
The company was founded by Kiichiro Toyoda in 1937, as a spinoff from his father's company Toyota
Industries to create automobiles. Three years earlier, in 1934, while still a department of Toyota
Industries, it created its first product, the Type A engine, and its first passenger car in 1936, the Toyota
AA. Toyota Motor Corporation produces vehicles under five brands, including the Toyota
brand, Hino, Lexus, Ranz, and Daihatsu. It also holds a 16.66% stake in Subaru Corporation, a 5.9%
stake in Isuzu, a 5.5% stake in Mazda, as well as joint-ventures with two in China (GAC
Toyota and Sichuan FAW Toyota Motor), one in India (Toyota Kirloskar), one in the Czech
Republic (TPCA), along with several "nonautomotive" companies. TMC is part of the Toyota Group,
one of the largest conglomerates in Japan.