Target Costing Final
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Transcript of Target Costing Final
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8/8/2019 Target Costing Final
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Target Costing
Presented by : Group 8
Manisha Chakravarty 47
Kapil Ahuja 51
Praggya 89
Sandeep Indukuri 103
Priodeep Dutta 123
Evenpreet Singh 131
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General Concept
Target Costing is a disciplined process for
determining and realizing a total cost at which
a proposed product with specified
functionality must be produced to generatethe desired profitability at its anticipated
selling price in the future.
Selling price desired profit = target cost
The customer sets the price
Profit must be achieved through cost control
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Target Costing Characteristics
Contradicts the traditional approach: designproduct, determine cost, set price
Intense customer focus
What do they want?
How much will they pay for it?
Can we make a profit on it? Find answers to these questions before
committing to the project
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Target Costing Characteristics
Cost control from the beginning
70-90% of costs are committed to at the design
stage
Focus on product and process design to engineer
out costs from the beginning
Saves costly changes later on
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Target Costing Characteristics
Product, manufacturing process, delivery
process designed simultaneously
Ensures features customers demand, but within
acceptable cost parameters
Eliminates the temptation to add costly features
Customers may not value the added features
Forces consideration of manufacturability
Reduces the need for subsequent changes
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Target Costing Characteristics
Cost control at all phases of the product life cycle
Design
Production
Delivery/setup
Customers cost of ownership
Emphasizes future sales instead of current cost savings
Service and repair
Disposal and recycling
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Target Costing Process
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Mapping the Product to the Market
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Establishing the Target Cost
Determine the product and its market
Who is the target market?
What do they want?
What do competitors offer?
Introduce concept or prototype
Evolutionary or revolutionary?
Refine until it meets customer needs
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Establishing the Target Cost
Determine the selling price
Must be acceptable to the customer
Must be able to withstand competition
Techniques
Existing price +/- value of features added or deleted
Consensus of focus group
Price predicted to achieve a desired market share
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Establishing the Target Cost
Determine the required profit
Return on sales
Desired return Historical return for similar products
Industry average for similar products
Return on sales will fluctuate over the life of theproduct
Price and costs fluctuate
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Establishing the Target Cost
Product Life Stage
UnitC
os
t
Gradual decline as volumeincreases
Competitors enter market,
straining supply of resources
Unexpected events affectcost of resources
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Establishing the Target Cost
Unit price, cost and profit are almost meaningless
because they fluctuate
Life cycle totals are more meaningful
Total expected revenue throughout product life
- Total desired profit throughout product life
Total target cost
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Achieving the Target Cost
Must include the features the customer wants
while maintaining cost at or below target
Want to meet the customers needs, but not
exceed them
Eliminating desired features will result in an undesirable
product
Adding unwanted features will increase cost
Failing to keep cost at or below target will result in
unacceptable profits
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Achieving the Target Cost
Determine the cost gap between current cost
and allowable cost
Current cost is based on
Currently used components
Current suppliers
Current manufacturing processes
Current distribution network
Etc.
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Achieving the Target Cost
Value chain decomposition
Cost reduction targets are divided among internal and
external activities
Internal costs
Labor, overhead, selling and administrative costs, etc.
External costs
Components and services acquired from suppliers,
etc.
Often represent a large proportion of total cost
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Make the Decision
Achieve
target
cost?
Close
enough?
Release design
for production
Abort
project
Repeat
value
engr.?
Value engineering
Yes
No
Yes
No
No
Yes
Begin
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Organizational Impact
Positives
Customer focus
Cross-functional
integration
Open sharing of
information
Better processunderstanding
Negatives
Too much customer
focus
Potential organizationalconflict
Too much pressure to
attain targets
Longer development
times