Target Costing

One example - Toyota

surpassed GM in 2005 as the largest auto manufacturer in the world.

It has been reported that Toyota's approach to entering the U.S. market was first to be steadfast in achieving a certain net profit margin.

they determined what price they had to offer in order to get Americans to buy their small import.

since the difference was the cost of the car they could offer, Toyota designed the solution accordingly. This method is known as “target costing.”

Target Costing

Target Costing is defined as a cost management tool for reducing the overall cost of a product over its product life cycle.

Target costing is a cost modeling technique that determines what price consumers are willing to pay for a product, and then works backwards to determine profit margins and allowable costs.

target cost a calculated number that the operating

costs cannot exceed once the product design is released.

applied at the beginning of a product’s life cycle during the concept and design phase.

This technique is in contrast to the traditional cost-plus markup method that is commonly used by manufacturers

It is easier and much less expensive to design costs out of a product rather than figure out how to eliminate them after the product is in production

Target Costing Our policy is to reduce the price, extend the operations

and improve the article. You will notice that the reduction of price comes first…. We first reduce the price to the point where we believe more sales will result…. The new price forces the cost down…the point is the fact that although one may calculate what a cost is, and of course all of our costs are carefully calculated, no one knows what a cost ought to be. One of the ways of discovering is to name a price so low as to force everybody in the place to the highest point of efficiency. The low price makes everybody dig for profits.

-Henry Ford

STEPS what the market is willing to pay for a

product. Three main players are taken into consideration: customers, competitors, and a company’s senior management.

competitors alternative and substitute products.

customer’s perceived value of a product as well as their attitude for purchasing products.

Senior management must define and adjust strategies to meet the company’s objectives.

CUSTOMER VIEWS company was considered 25 % costlier by

customers and not meeting expectations. A STRUCTURED TARGET COSTING EXRECISE. extensive survey was conducted in the target

market segment through the market teams and the following characteristics or features were tabulated as priority of customers:

Mixability with petrolGloss in the paintHiding in one coatFlow through gun nozzleDrying Time.SmellColour range

A typical enamel paint consists of materials such as pigments,

resins, solvents and other additives A functional mapping and value engineering

was carried out of the current over priced product and gaps identified for value improvement and cost reduction. For example the current drying time was 16 hours and the target established by the customers was 8 hours. redesign in one of the components.

STEP 3 Calculate the allowable product cost If the maximum allowable product cost is

exceeded there will be undesirable outcomes. First, the company will increase the price of the

product in order to maintain the desired profit margin. This will decrease sales volume and the optimal sales-price combination will not be achieved.

Second, investors will be dissatisfied

The firm has two options for reducing costs to a target cost level:

Integrating new manufacturing technology

Redesigning the product or service

STEP 2 Determine target profit margin

– Profit margins must be set to satisfy the expectations of both the company and its investors.

Two approaches - baseline experiences and capital budgeting using lifecycle analysis.

Steps required for Target Costing Determine the market price. Determine the desired profit. Calculate the target cost at market price less

desired profit. (Target Cost=Competitive Price-Desired Profit)

Use value engineering to identify ways to reduce product cost

Use kaizen costing and operational control to further reduce cost.

Value Engineering To reduce product cost by analyzing the

trade-offs between (1) different types and levels of product

functionality and (2) total product cost

Value Engineering Functional analysis

Design Analysis

Cost tables

Group Technology

Functional Analysis

A common type of value engineering in which the performance and cost of each major function or feature of the product is examined.

Design Analysis

The form in which the design team prepares several possible designs of the product, each having similar features that have different levels of performance and different cost.

Cost Tables

Computer-based databases that include comprehensive information about the firm’s cost drivers.

Group Technology

A method of identifying similarities in the parts of products a firm manufactures, so the same part can be used in two or more products, thereby reducing costs.

ONE MORE EXAMPLE The Indian government has launched a

prototype of a laptop touch screen like the iPad, with the price of just $ 35 (£ 23, which hopes to make next year. Tablets are intended for students in which this tablet supports web browsing, video conferencing and word processing, developers said

Nicholas Negroponte – MIT Media Lab – announced plans to develop a tablet computer at a price of $ 99 through the cooperation of his nonprofit, One Laptop per Child

Thanks………