Target Costing

Ludwigsburg
VM

Target costs

Up to 70ties

C+B=P

Costs and benefit

(profit) regulate the
price

Up to 80ties

P-C=B

Achievable price and costs

determine the benefit
(profit).

P-B=C

Price and benefit

(profit) target
determine the costs

.
.
.
.
.

Today

Retrograde calculation
Cost plus calculation
(period related)

Material costs
Material overhead costs
Production wages
Production overhead costs

Retrograde calculation
(before development start;
related to product life cycle)

Target sales
./. binding profit rate (product related)

Development overhead costs

Administration overhead costs
Sales overhead costs
----------------------------------------------------------------------

Cost of sales

Starting point
for target
achievement

---------------------------------------------------------------------

COSTS ALLOWED BY THE MARKET

activity 1
activity 2

---------------------------------------------------------------------

PRODUCTION COSTS

(Source: AO-C)

Target production costs

Target development costs

activity 3
activity 4
activity 5
activity 6
activity 7

Target sales and

administration costs

activity 8
activity 9
activity ..

Profit surcharge
SALES PRICE

activity ..
activity ..

----------------------------------------------------------------------

activity ..

----------------------------------------------------------------------

What does a product cost us?

What can a product cost us?

(And how can we charge that to our customer?)

(And how can we reach that?)

Target Costing
Derivation
Ableitung von
of target
Zielkosten
costs

Market prices

Planning costs
(within group)

Costs of competitors

Current costs

Target costs
- for products
- for product functions
- for components

Conversion

Target costs
- for processes
- for functions

Market orientated company control by cost information

Derivation of change requirement from target costs for:

Structures

Techniques

Processes

Cost information for early phases of the product development process

Product functional budgeting

Set-up target cost chains with the integration of supplier costs
4

Modules of target costing at

MANN+HUMMEL

Tool Box

Market
data

Specification
management

(Source: AO-C)

Retrograde
calculation

Determination
of target cost
gap

Target cost separation in

component and / or
function Target cost setting

Measures for
cost reduction

value engineering
outsourcing (MoB)

Retrograde calculation
Phases

Target cost derivation

Costs
component D

Planned
profit
Market
price

Target
costs
(max.
allowed
total costs)

Target cost
achievement

Target cost
improvement

Target cost
Gap

Costs
component C

Breakdown to
component level
(or
functional
level)

Target price

Target cost
decomposition

Costs
component B
Costs
component A
Division costs

Costs
component D

Costs
component D
Costs
component C
Costs
component B
Costs
component A
Division costs

Measures
for cost
reduction

Costs
component C

Division costs

Component
Actual com- Target com- - value
engineering
costs
ponent
ponent
SimultaAccording to
costs
costs
(Bottom-up)
Product
standard costs

CIP

Costs
component B
Costs
component A

neous
target cost
(Top-Down)
Engineering controlled
Costs allowed
- Outsourcing concept revision
by the market
- Others

Continuous
Improvement
process

The procedure of Target Costing ...

Planned
turnover

(Price x quantity; i.e.

40.000,- EUR x 1000 pieces
=40 Mio. EUR)

Target
rate of return
([40.000,- EUR x 20 % =
8000,-] x 1000 pieces)

Product profile
(function weighting
by customers)

target costs

allowable costs
([40.000,- EUR - 8000,- EUR
=32.000,- EUR] x 1000 pieces)

Cost splitting

drifting costs
=
allowable costs?

(i.e. 32.120,- EUR

x 1000 pieces)

Estimated costs/
drifting costs
(i.e. 35.000,- EUR
x 1000 pieces)

N
Measures to
reduce the
drifting costs

... leads to concrete individual measures to reduce the costs of existing

product concepts.

Target price and target costs

Target Costing
Retrograde Kalkulation

Produkt: Lufisystem Benchmark

Projektleiter: Del Corrall

1 Preis pro Stck (ohne Savings)

1a Erlse aus nderungen
2 Target Profit
3 vom Markt erlaubte Kosten
4 Zieloverhead
5 Geschftsbereichsoverhead
6 Entwicklungskosten (projektspezifisch)
7 Zahlungsbedingungen
10 Vom Team beeinflubare Kosten:

E
PL
AM
X
E
Luftfilter 1,9 Diesel 889

Datum: 14.03.2006

Projektnummer: GM1044
Luftfilter 1,8 Otto 883

Basis Lufisystem GM1007 Epsilon Target price+HK

fr System GM1044 Delta

Kunde: GM

Rohluftrohr 896

EURO
je Stck

%
6,57

% v. 3
1-2
5+6+7
% v. 13

4,0%

10,5%

% v. 1

0,80%

0,25
6,32
0,65
0,60
0,00
0,05

Reinluftrohr 897

EURO
je Stck

EURO
je Stck

%
5,96

4,0%

10,5%
0,80%

0,23
5,73
0,59
0,54
0,00
0,05

EURO
je Stck

%
1,29

4,0%

10,5%
0,80%

0,05
1,24
0,13
0,12
0,00
0,01

Reinluftrohr 787
EURO
je Stck

%
7,02

4,0%

10,5%
0,80%

0,27
6,75
0,70
0,64
0,00
0,06

4,93
4,0%

0,19
4,74
0,49
0,45
0,00
0,04

10,5%
0,80%

3-4

5,66

5,14

1,11

6,05

4,25

12 Zielkostenlcke

10-13

-0,55

-3,04

-0,56

-0,98

-0,15

13 Transferpreis
14 Werksoverhead (nur bedingt beeinflussbar)
15 HK 2
16 Ausschuss
17 HK 1
18 Maschinenkosten
19 Rskosten
20 Fertigungslohn
21 Materialgemeinkosten
22 Material EK-Preis
23 EK-Preis Romaterial (Granulat und Blech)

14+15
% v. 17
17+16

6,21
0,46
5,75
0,06
5,70
0,91
0,05
0,90
0,14
3,70
0,00

8,18
0,61
7,58
0,08
7,50
1,14
0,01
1,83
0,16
4,36
0,00

1,67
0,12
1,55
0,05
1,50
0,95
0,06
0,08
0,01
0,40
0,00

7,03
0,52
6,51
0,06
6,44
0,90
0,04
0,91
0,16
4,43
0,00

8,0%
1,0%

3,7%

8,0%
1,0%

3,7%

8,0%
3,0%

3,7%

8,0%
1,0%

3,7%

4,40
0,33
4,07
0,04
4,03
0,23
0,01
1,74
0,07
1,98

8,0%
1,0%

3,7%

The first target price calculation shows how high pressure is for target costs
to be reached.
8

M+H Project Profitability Statement

PER

Originator:

Mnch

Dept.:

Project Title:

Sonstiges

PRF Nr.:

Customer:

Projekt
Ergebnis
Rechnung

Column 1

Proj. Nr.:

Column 2

(Source: AO-C)

###
Project Mgr:

SOP:

Company/PG:

Prod.
Center:

Exchange rate:

MAR 2006

Date:

Januar 14, 2005

Part Nr.:

Currency:

Euro

Part Nr.:

Level:

A:

General Data

Gross Sales p.a. (excluding other revenues) at average selling price over lifetime

annual

Selling price at SOP

Lifetime of the project in years

Average volume p.a. (# of units)

Revenues R&D

Revenues Production Tooling

507.000

Revenues Prototypes, Parts and Tooling

216.600

New investments

570.000

B:

Average Operating Income (BE) over lifetime of project

Operating Income (BE)

9a

Targeted Operating Income (Target-BE)

C:

Average Contribution to fixed cost coverage

10

Contribution to fixed cost coverage

D:

Cost Data

11a

-/+ Over- or underabsorption R&D costs

397.260

79.452

11b

-/+ Over- or underabsorption production tooling costs

-23.700

-4.740

11c

-/+ Over- or underabsorption prototype costs

48.086

9.617

11d

Interest and Business Unit overhead costs on 11a-11c

126.752

11

per part

2.973.340

Date:

Level:

annual

per part

16,80

100,0%

#DIV/0!

17,23

102,6%

#DIV/0!

123.814

0,70

4,2%

#DIV/0!

178.400

1,01

6,0%

726.516

4,10

24,4%

#DIV/0!

0,45

2,7%

#DIV/0!

-0,03

-0,2%

#DIV/0!

0,05

0,3%

#DIV/0!

25.350

0,14

0,9%

Costs to be amortized in piece price (line item 11a-11d)

109.680

0,62

3,7%

5,0
177.000
0

Column
1

Col
um
n2

#DIV/0!

0,00

#DIV/0!

12

Direct material costs

917.904

5,19

30,9%

0,0%

12a

Direct material costs high value purchased parts

885.000

5,00

29,8%

0,0%

13

Direct labor costs

201.347

1,14

6,8%

0,0%

14

Other variable production costs

77.351

0,44

2,6%

0,0%

0,00

0,0%

0,0%

17.543

0,10

0,6%

2.208.824

12,48

74,3%

15

Costs for packaging and transport

16

Terms of payment, licenses, commissions

17

Marginal product cost (line item 11-16)

0,59%

Column
1

Colu
mn
2

0,0%

0,00

0,0%

18

Process surcharge material ovhd costs

60.000

12.000

0,07

0,4%

0,0%

19

Process surcharge production and plant ovhd costs

60.000

12.000

0,07

0,4%

0,0%

20

Process surcharge business unit costs

70.000

14.000

0,08

0,5%

21

Mar. product + process costs (line item 11-20)

2.246.824

12,69

75,6%

63.222

0,36

2,1%

0,0%

273.639

1,55

9,2%

0,0%

0,0%

0,00

0,0%

22

Material overhead costs

23

Fixed production costs

24

Plant overhead costs

1,99%

49.651

0,28

1,7%

0,0%

25

Company BU overhead costs

2,80%

44.999

0,25

1,5%

0,0%

26

BU overhead costs ww

9,00%

144.640

0,82

4,9%

0,0%

27

BU overhead costs high value purchased parts

3,00%

26.550

0,15

0,9%

E:

Total M+H costs (line item 11-27)

2.822.976

16,10

95,8%

P = Standard costs

14,08
5,00
1,77

3,51%

The data for the target costing can be gained from the PER (M+H Standard
calculation sheet).
Remarks :

thereof direct material high value purchased

parts
Scrap [%]

0,81
%

Other

0,0%

0,00

0,0%

83,8%

0,00

0,0%

29,8%

0,00

0,0%

10,5%

0,00

0,0%

Overview project profitability calculation

(Quelle: AO-C)

Project profitability calculation (german abbreviation PER), calculation and

its targets:
1. At the bidding phase :
 Support when determining the sales prices and the recognition of trends (market
price,)
 Determination of profitability (operating result, profit margin) and consequently
decision basis for the UB management and the bidding team
 Estimation of risks (investments, etc.)
 Basis for the customer specific cost break down
 Basis for value engineering

2. At the development phase :

 Follow-up on profitability (straight edge for the team)
 Basis for value engineering
 Support when determining the sales price for changes
10

Contact person

Dr. Patricie Merkert

Johannes Krau

VM - Management Systeme

VM - Management Systeme

+49 (7141) 98 2366

patricie.merkert@mann-hummel.com

+49 (7141) 98 2645

johannes.krauss@mann-hummel.com

11