1. TARGET COSTING**
LIFE CYCLE
COSTS
CROSS
FUNCTIONAL
CUSTOMER
FOCUSED
PRICE
LED $
DESIGN
DRIVEN
VALUE CHAIN
** These slides have been developed jointly with CAM-I and include material covered in the book
Target Costing: The Next Frontier In Strategic Cost Management
By:
Shahid Ansari
Jan Bell
and
The CAM-I Target Cost Core Group
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

2. TARGET COSTING ... A Case for Action
Global competition with mobile capital
Technology leadership no longer provides lasting competitive edge
Pressure for lower prices
Shorter product life cycles
Demand for custom products
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

3. TARGET COSTING ... The new competitive environment
Global competitiveness requires balancing quality, cost, and time
Quality
Cost
Time
Target costing focuses on all three dimensions of the strategic triangle
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

4. State of the Art in the U.S.
TARGET COSTING...
State of the Art in the U.S.
US Companies
67% use cost plus pricing
Cost estimates need great improvements
Estimate of sales volume provided to suppliers are overstated between 11-25%
No tight monitoring of profits, costs, capital investment, quality, development budget, and performance.
100% used price minus profit
Achieve 80% accuracy of cost estimates at product concept stage
Estimate of sales volume provided to suppliers are within +/-5%
Tight monitoring of profits, costs, capital investment, quality, development budget, and performance.
Japanese Companies
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

5. TARGET COSTING... What Is It?
A target cost is the allowable amount of cost that can be incurred on a product and still earn the required profit from that product
A strategic profit and cost management process
Price-led
Customer-focused
Design-centered
Cross-functional
Life cycle oriented
Value Chain-based
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

6. TARGET COSTING... Managing committed costs
PRODUCT
CONCEPT
DESIGN AND
DEVELOPMENT
PRODUCTION
P R O D U C T D E V E L O P M E N T C Y C L E 20 40 60 80
100
Costs
Committed Costs
Incurred Costs
DISTRIBUTION
SERVICE
DISPOSITION
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

7. A Different Profit Planning Approach
TARGET COSTING...
A Different Profit Planning Approach
Cost Plus
Market considerations not part of cost planning.
Costs determine price.
Waste and inefficiency is focus of cost reduction efforts.
Cost reduction is not customer driven.
Cost accountants manage costs.
Suppliers involved after product designed.
Minimizes initial price paid by customer.
Little or no involvement of value chain in cost planning.
Competitive market considerations drive cost planning.
Price determines costs.
Cost reduction is achieved by simultaneous product/process design.
Customer input guides cost reduction.
Cross-functional teams manage costs.
Suppliers involved in concept and design of product.
Minimizes cost of ownership to customer.
Involves the value chain in cost planning.
Target Costing
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

8. TARGET COSTING... In the Product Development Process
Market
Research
Competitive
Strategy
Intelligence
Product
Concept &
Feasibility
Product Strategy
and Profit Plans
Design &
Development
Production
and
Logistics
ESTABLISH TARGET COSTS
ATTAIN TARGET COSTS
VOICE OF THE CUSTOMER
EXTENDED ENTERPRISE PARTICIPATION
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

9. TARGET COSTING... Setting Target Costs
Market
Research $
Market
Research
MARKET
PRICE
Understand
Customer
Requirements
Define
Product
Features
Define Product/
Customer Niche
TARGET
COST
Competitor
Analysis
Competitive
Analysis
REQUIRED
PROFIT
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

10. TARGET COSTING... Voice of the Customer
Develop a market-focused mindset
Open-minded, inquisitive, take nothing for granted, share what you learn
Solicit customer information
Panels, focus groups, interviews, surveys
Analyze customer feedback
Profiles, charts, maps, tables
Understand completely what the customer truly values
Features and cost determine value
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

11. TARGET COSTING... Price and Profit Margin
Pricing is dynamic
Collectively consider competitor prices, market share goals, and customer’s acceptable price.
Compute profit over the life of a product
Profit targets may change each year
Target margins must consider firm’s required financial rate of return
Multi-year
Product
and
Profit Plan
Market
Price
Required
Profit
ALLOWABLE
TARGET COST
Price - Profit
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

12. TARGET COSTING... Who Participates
Major cross-functional teams
Business Planning Team
Product Team
Design Team
Product Manufacturing Team
Team and functional coordination
Supporting infrastructure
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

13. TARGET COSTING... Involving the Value Chain
SUPPLIERS
TIER TWO
TIER THREE
TIER ONE
CUSTOMERS
PRODUCER
DISTRIBUTORS
SERVICE &
SUPPORT
RECYCLERS/
DISPOSERS
OPTIMIZING THE SUPPLY CHAIN
Characterize the Supply Chain
Nature and number of suppliers
Distance from the producer
Develop Long Term Relationships
Involve Suppliers in Design
Maintain Margins
EXPECTED CONTRIBUTIONS
Better Focus on Customer Requirements
Provide Input and Ideas Early in the Concept Formation Stage
Eliminate Non-Value Added Activities
Pursue Standardization
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

14. TARGET COSTING... Achieving Target Costs
COMPUTE COST GAP
DESIGN COSTS OUT
PRODUCE
Perform
Value
Engineering
Initial
Cost Estimates
Compare
To Target
Cost
Design
Products/
Processes
Estimate
Achievable
Cost
Release Design to
Production
ACTUAL
COST
Perform
Cost
Analysis
Undertake
Continuous
Improvement
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

15. TARGET COSTING... Information Requirements
COMPETITIVE INTELLIGENCE
MARKETING DATA
COST DATA
ENGINEERING DATA
PROCUREMENT DATA
Information not routinely collected.
Existing information not routinely available.
TARGET COST
INFORMATION
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

16. TARGET COSTING... Typical Information Gaps
PRODUCT
STRATEGY
CONCEPT AND
FEASIBILITY
DESIGN AND
DEVELOPMENT
PRODUCTION
& LOGISTICS
Product Development Cycle (When tools are used)
Competitive
Intelligence
Competitive Prices
and Features
Competitor Cost
Product
Life-cycle
Feature/Price Data
Attribute/Price Data
Customer &
Marketing
Attribute/Cost Data
Function Cost Data
Cost systems
Feature/Cost Data
Type of Information needed
Improvement Ideas Database
Engineering
Systems
Component
Interaction
VE Case Studies
Technology Life
Cycle
Procurement
Supplier Cost Data
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

17. TARGET COSTING... Supporting Tools
Planning
Marketing
Engineering
Procurement
Multiyear Product Plan
Value Engineering
DTC
QFD
Supplier Based
DFMA, DTC
Benchmarking
Cost Tables
Feature Costing
Function Cost
Component Cost
Process Costing
Costing
PRODUCT
STRATEGY
CONCEPT AND
FEASIBILITY
DESIGN AND
DEVELOPMENT
PRODUCTION
& LOGISTICS
Product Development Cycle (When tools are used)
Functional Expertise for Tools
Value Analysis
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

18. TARGET COSTING... Extending The Domain
Many service industries (e.g. telecommunications) are design driven and can use target costing.
The design philosophy of target costing can be broadly applied to many non-manufacturing situations.
The customer value approach of target costing provides a useful strategic umbrella for ABM and BPR leading to an integrated cost management approach.
Target Costing can be used to address legacy costs through creative redesign.
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

19. TARGET COSTING... Does It Work?
CHRYSLER’S RESULTS
Meets customer requirements for safety and driveability
Neon named “Auto of the Year” in 1994
Short development time (concept to market 31 months)
Below projected development and investment budget
Neon one of few small cars that earns a positive return
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.

20. TARGET COSTING... Critical Success Factors
LEADERSHIP
POLITICAL
Accommodate legitimate interests
Obtain “buy-in” from major groups
Avoid turf battles
BEHAVIORAL
Early functional involvement
Engineering owns costs
Marketing evaluates trades
Targets are commitments
Cross-functional cooperation
Accounting as “business advisor”
TECHNICAL/ STRUCTURAL
New data
New tools
Cross-functional teams
New business processes
Revised career paths
Partnerships in value chain
Customer focus
Trust
Open information sharing
Cross-functional teamwork
CULTURAL
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.