Presentation on theme: "Target Costing If you cannot find the time to do it right, how will you find the time to do it over?"— Presentation transcript:
1 Target CostingIf you cannot find the time to do it right, how will you find the time to do it over?
2 General ConceptTarget cost is the cost that can be incurred while still earning the desired profitSelling price – desired profit = target costThe customer sets the priceProfit must be achieved through cost control
3 Target Costing Characteristics Contradicts the traditional approach: design product, determine cost, set priceIntense customer focusWhat do they want?How much will they pay for it?Can we make a profit on it?Want answers to these questions before committing to the project
4 Target Costing Characteristics Cost control from the beginning70-90% of costs are committed to at the design stageFocus on product and process design to engineer out costs from the beginningSaves costly changes later on
5 Target Costing Characteristics Product, manufacturing process, delivery process designed simultaneouslyEnsures features customers demand, but within acceptable cost parametersEliminates the temptation to add costly featuresCustomers may not value the added featuresForces consideration of manufacturabilityReduces the need for subsequent changes
6 Target Costing Characteristics Cost control at all phases of the product life cycleDesignProductionDelivery/setupCustomer’s cost of ownershipEmphasizes future sales instead of current cost savingsService and repairDisposal and recycling
7 Cross-Functional Team MarketingDesign/engineeringManufacturingPurchasingIncluding suppliersDistributionService/supportCost accountingFinanceLegal
8 Target Costing Process Two stage processEstablish the target costMarket researchProduct planning, concept development stagesAchieve the target costValue engineering, continuous improvementDesign stageContinuous improvement in later stages
9 Establishing the Target Cost Determine the product and its marketWho is the target market?What do they want?What do competitors offer?Introduce concept or prototypeEvolutionary or revolutionary?Refine until it meets customer needs
10 Establishing the Target Cost Determine the selling priceMust be acceptable to the customerMust be able to withstand competitionTechniquesExisting price +/- value of features added or deletedConsensus of focus groupPrice predicted to achieve a desired market share
11 Establishing the Target Cost Determine the required profitReturn on salesDesired returnHistorical return for similar productsIndustry average for similar productsReturn on sales will fluctuate over the life of the productPrice and costs fluctuate
12 Establishing the Target Cost Unit Selling PriceProduct Life Stage
13 Establishing the Target Cost Gradual decline as volume increasesCompetitors enter market, straining supply of resourcesUnexpected events affect cost of resourcesUnit CostProduct Life Stage
14 Establishing the Target Cost Unit price, cost and profit are almost meaningless because they fluctuateLife cycle totals are more meaningfulTotal expected revenue throughout product lifeTotal desired profit throughout product lifeTotal target cost
15 Achieving the Target Cost Must include the features the customer wants while maintaining cost at or below targetWant to meet the customers needs, but not exceed themEliminating desired features will result in an undesirable productAdding unwanted features will increase costFailing to keep cost at or below target will result in unacceptable profits
16 Achieving the Target Cost Rank customer requirements (exhibit 1)What does the customer want?How important is each function to the customer?What do we and our competitors currently offer?Competitive evaluation (exhibit 1)Do our current product features meet the customer needs?Are the customers’ needs met, unmet or exceeded?What can we learn from our competitors’ products?
18 Achieving the Target Cost Determine the cost gap between current cost and allowable costCurrent cost is based onCurrently used componentsCurrent suppliersCurrent manufacturing processesCurrent distribution networkEtc.
19 Achieving the Target Cost Decompose the cost gap (exhibit 2)Life cycle decompositionCost reduction goals are divided among the functions in the product’s life cycleDesign/engineeringManufacturingSales/distributionService/supportGeneral administrationEtc.
20 Achieving the Target Cost Value chain decompositionCost reduction targets are divided among internal and external activitiesInternal costsLabor, overhead, selling and administrative costs, etc.External costsComponents and services acquired from suppliers, etc.Often represent a large proportion of total cost
22 Achieving the Target Cost Perform value engineering to design out costs without sacrificing needed featuresPerform a cost analysis of major components and activitiesList components or activities and their functionsCalculate a cost breakdown (exhibit 3)Determine the current cost of each component or activity and convert to percentage of total costCosts include materials, labor, overhead, etc.
24 Achieving the Target Cost Relate the components to customer requirements (exhibit 4)Develop Quality-Function-Deployment matrixIndicates which components have the greatest impact on customer requirementsDevelop a functional ranking (exhibit 5)Indicates the importance of each component to the customerBased on the component’s contribution to providing the desired functions
26 Achieving the Target Cost Contribution weight assigned to the component * importance to the customer (exhibit 1)
27 Achieving the Target Cost Identify components for cost reductionCalculate a value index for each major component (exhibit 6)Component cost as a percentage of total cost divided by the component’s relative importance to the customerIndex greater than 1Disproportionately high cost in relation to its importanceImplies cost reduction should be consideredDo not manage by the numbers alone
29 Achieving the Target Cost Generate cost reduction ideasEliminate over-engineeringEliminate, replace, combine, rearrangeSeek ways to accomplish the goal at less costConsider the process as well as the productMore efficient manufacturing processesBetter logisticsEtc.
30 Achieving the Target Cost Test the ideasWill they be effective?Are they technologically feasible?Is there a domino effect?Construct a component interaction matrix (exhibit 7)Do activities interact?Estimate the achievable costsUse activity-based costing, cost tables, etc.
32 Make the Decision Begin Value engineering Repeat value engr.? Close enough?Achievetargetcost?YesNoNoYesYesNoAbortprojectRelease designfor production
33 Organizational Impact PositivesCustomer focusCross-functional integrationOpen sharing of informationBetter process understandingNegativesToo much customer focusPotential organizational conflictToo much pressure to attain targetsLonger development times