Definition and Meaning of Target Costing

Amit Sheth Anand Dube Dhruv Joshi Samir Daddikar Swapnil Mehta

 Target Cost = Anticipated selling price ² Desired profit .Companies following Target Costing COMPAQ DAIMLER CHRYSLER NEC FORD  TOYOTA ISUZU MOTORS The target costing for a product is calculated by starting with the product's anticipated selling price and then deducting the desired profit.

Definition 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. .

Value Engineering .Maximising profit and reducing product costs Value Engineering in Japan Genka Kikaku   Development of Target Costing    Burst of Japanese economic bubble in 1990-91. Long recession prevalent in Japan. .History   Originated in Japan in 1960s. Severe appreciation of Yen against $.

cost kaizen . inevitably lead to fewer opportunities to cut costs (Tanaka)  Solution:  Actual costs --> predetermined costs .History  Implemented first by Toyota in 1965 Reasons:    80-90% of the life cycle cost is determined at the design phase of the product (Tanaka) Continuous improvement.

US v/s Japan Cost Mgmt. .

Includes the customer's costs. Target Costing Market driven price less profit = target cost approach. emphasis on designing products ith fe er parts and common parts. Profit = Price . e.Cost or Price = Cost + Profit Emphasis on production costs. Cost reduction emphasis Production stage. esign stage. . Target Cost = Target Price Target Profit Emphasis on the product life cycle costs over the entire value chain. Emphasis on udgeted costs.g. Focus on the demand side first.Traditional Costing v/s Target Costing Concept Focus of the cost price relationship Algebraic relationship between cost and price Value chain and product life cycle emphasis Traditional Costing Engineer driven cost plus mark-up = price approach Focus on the supply side first..

Target Cost Concept Product Requirements & Market Analysis Target Priceless Profit Balance Target Cost & Requirements Make/Buy Analysis Supplier Target Costing Explore Product & Process Design Alternatives & Design Product & Process Cost Projections Value Analysis Production Continuous Cost Reduction .

Minimize non value-added activities. Implementation enhances employee awareness and empowerment. Orients organizations towards customers. Foster partnerships with suppliers. Breaks down barriers between departments.Advantages of Target Costing         Proactive approach to cost management. Encourages selection of lowest cost value added activities. Reduced time to market. .

Requires many meetings for co-ordination.Disadvantages of Target Costing  Effective implementation and use requires the development of detailed cost data.    . May reduce the quality of products due to the use of cheap components which may be of inferior quality. Its implementation requires willingness to cooperate.

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