Target Costing

History
Target costing was invented by Toyota in 1965.

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)


80-90% of the life cycle cost is determined at the design
phase of the product

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.


A target cost is the maximum amount of cost
that can be incurred on a product.

Target Cost = Market Price Expected Margin

TARGET COST MANAGEMENT

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

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 itsnt 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 production-line complexity.

Selecting appropriate product and process
technologies.

Lowering product design late in the innovation
process.

Eliminating cost overruns.

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


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.