You are on page 1of 15

Presented By: Sarthak Agarwal - 34101 Abhishek Asthana - 34102 Manoj Balasubramanian - 34103 Anjanesh Dhawan - 34110 Abhilasha

Gautam - 34114 Rajat Girdhar - 34117 Swetha Rao - 34134 Chintan Shah - 34144 Hiran Shah - 34145

An approach used to identify the anticipated selling price for product as well as the allowable price for each component

Companies can use Target Pricing to create products that are competitively priced while still maintaining a companys desired profit margin. Target Costing is a part of Target pricing and has many advantages in cost containment and eliminating unneeded costs. It helps make sure that money spent on the product is justified.

The goal of Target costing is: o Design a product following a set cost structure o Cut unnecessary costs o Improve product design

Target pricing/costing is based off this simple equation:


Component #1 Component #2 Component #3

Determine anticipated selling price

Identify desired profit margin

Calculate allowable price for each unit component

Perform Market Research & Identify Customer Needs

Determine Target Price & Desired Profit Margin

Develop Cost Projections for Each Component

Explore Different Product Design Alternatives Perform Value Engineering / Value Analysis

Production

Approved final product design

Continuous Cost Reduction

Perform Market Research & Identify Customer Needs

Determine Target Price & Desired Profit Margin

Part 1 - Analysis o Begin by researching the target market and consumer o Determine a target price that consumers expect o Determine how much profit margin you expect
Example Tata Nano o Tata motors produces passenger cars like Indica and Indigo o Cheapest passenger car in India Maruti Alto starts at Rs. 2.4 lacs. Tata wants to sell a car at Rs. 1 lac i.e. the Nano o Tata wants to earn a 20% margin (approximate) on the Nano o With an target sell price of Rs. 1 lac, a 20% margin, Tata can spend Rs. 80,000 to create a Nano

Develop Cost Projections for Each Component

Explore Different Product Design Alternatives Perform Value Engineering / Value Analysis
Part 2 - Design o Once an overall cost allowance is calculated, determine cost projections for each component within the product o Design the component within the allocated cost budget o Value Engineering / Value Analysis (VE/VA) for each component asks whether the part can be substituted, simplified, or eliminated Example o Component cost reduction at vendor level o Hollow steering column as the engine was on the back of the car o Fixed hatch, trunk is accessible only from inside o No power steering, due to light weight o One windscreen wiper

Perform Value Engineering / Value Analysis

Production

Approved final product design

Continuous Cost Reduction

Part 3 - Implement o Once a final product is design that meets the allocated cost budget production begins o Continue to re-evaluate the product design using VA/VE to continue cost reductions Example o Achieve high volumes to further reduce costs through economies of scale. o Approximately 20 companies supply 70% of the total parts promoting centralization of purchases and cost reduction.

Perform Market Research & Identify Customer Needs

Determine Target Price & Desired Profit Margin

o o

o o

Volkswagen launched Polo in January 2010 at a base price of 4.3 lacs. After Polos success Volkswagen eyed the mid segment sedan market dominated by Honda City in 2010. Thus, Vento A sedan version of Polo was launched with a base price of 7 lacs. Thus value was added to a 4.3 lack product to make it a 7 lac product ( minus profit margins)

Develop Cost Projections for Each Component

Explore Different Product Design Alternatives Perform Value Engineering / Value Analysis

o o o o

Vento uses metallic grilles and light The third section or boot is well integrated with the body. The engine size was increased from 1.2l to 1.6l in base petrol (trendline) models. Better breaking system, tubeless radials and comfort features in the interiors.

Target costing is based off this simple equation:

Determine anticipated selling price

Identify desired profit margin

Calculate allowable price for each unit component

Component #1 Component #2 Component #3

Accounting for Management, Target Costing Approach to Pricing, Apr 8, 2010, http://www.accountingformanagement.com/target_costing_pricing_products_and_services.htm All Business A D&B Company, Managerial implications of target costing Apr 6, 2010, http://www.allbusiness.com/accounting-reporting/methods-standards-cost-accounting/8465191.html Management Accounting Quarterly, Best Practices in Target Costing, Apr 7, 2010, http://www.imanet.org/pdf/1236.pdf ISM, Target Costing Model, Apr 8, 2010, http://images.google.com/imgres?imgurl=http://www.npdsolutions.com/image33.gif&imgrefurl=http://www.npdsolutions.com/target.html&usg=__iiMpHaeUC8MEhTdCrdQLiSX0A8=&h=275&w=361&sz=5&hl=en&start=1&itbs=1&tbnid=8DLY8XciaXc3lM:&tbnh=92&tbnw=121&p rev=/images%3Fq%3Dtarget%2Bcosting%26hl%3Den%26safe%3Dactive%26sa%3DN%26gbv%3D2%26nd sp%3D20%26tbs%3Disch:1

Yasuhiro Monden and Kazuki Hamada, "Target Costing-Kaizen Costing in Japanese Automobile Companies," Journal of Management Accounting Research 3, pp. 16-34.
ET, Tata Nano: Thin margins worry dealers, Jan 12, 2008 http://articles.economictimes.indiatimes.com/2008-01-12/news/27710914_1_tata-nano-tatamotors-dealer-premium-cars