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Target Costing

Maria Osipova
Inna Dueck
Tatiana Volina
Ivan Kraynev
Vladimir Alferov
History
 Target costing was invented by Toyota in 1965
Reasons:
 80-90% of the life cycle cost is determined at the
design phase of the product (Tanaka)
 continuous improvement, “cost kaizen”, inevitably
lead to fewer opportunities to cut costs (Tanaka)

SOLUTION: actual costs -> predetermined costs


Definition

 Target Costing is defined as a cost


management tool for reducing the
overall cost of a product over its
entire life-cycle with the help of
production, engineering, research
and design.
TARGET-COSTING PRINCIPLES

1. price-led costing.
2. focus on customers.
3. focus on design.
4. cross-functional involvement.
5. value-chain involvement.
6. a life-cycle orientation..
Target costing objectives

 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.
 To decompose the production process and then
to set cost targets for each product element.
Approaches to target costing
 Price-based targeting
 Cost-based targeting
 Value-based targeting

 A target cost is the maximum amount of cost


that can be incurred on a product.
 Target Cost = Market Price – Expected Margin
Price-based targeting

 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.
Cost-based targeting
 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 itsn’t good
for the long run.
Value-based targeting
 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.
Benefits

 Delivering the optimal value proposition to


end customers.
 Minimizing product-line complexity.
 Selecting appropriate product and process
technologies.
 Lowering product design late in the innovation
process.
 Eliminating cost overruns.
Negative points
 possible misuse of the technique.
Producers might make use of cost-based target costing to
squeeze the profit margins of suppliers, thereby getting
materials at the lowest cost possible.
 the stress on the design team of companies using target
costing
 disadvantage to the company.

Product development time might be lengthen as product


is repeatedly designed to bring cost below that of
target.
Three main elements of the target costing process
by Cooper & Slagmulder
Implementation
1. Price-led costing ~ market prices are used to
determine target costs

2. Focus on customers ~ value to the customer


must be greater than the cost of the product
itself

3. Focus on design ~ cost control must occur


before production
4. Cross-functional involvement ~ interfunctional
product and process teams

5. Value-chain involvement ~ all members of the


value chain included

6. Life-cycle orientation ~ minimizing total life-


cycle costs
Control Points

Top management in case of establishing a new product

Cost estimating group decomposing the preset value

Cross-functional target costing teams analysing the


production process
Similar approach to the target
costing by Caterpillar
 The main aim: to reduce costs by 5.4%

 The cost of the comparable model is based on


current manufacturing capabilities
Similar approach to the target
costing by Caterpillar
 cross-functional organizational team
 emphasize cost reduction during the new
product development cycle
 reduce costs through efficiency improvements

Caterpillar
Similar approach to the target
costing by Caterpillar
A few areas of reduction:
 Assembly
 Cab
 Engine
 Hydraulics
 Power Train
 Structures
 Linkage
 Other
Target costing prospectives
 Target costing which has been widely used by
Japanese firms since 1970s now is spread all over
the world
 Main industries: transportation and heavy
equipment industries (Intensive competition,
extensive supply chains, and relatively long
product development cycles)
Thank you for attention