A

PRESENTATION
ON
TARGET COSTING

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 TARGET COSTING
• ORIGIN

The concept of TARGET COSTING had its origin in

JAPAN in 1960 as a result of difficult market conditions.

Due to proliferation of consumer and industrial products of

western firms in the ASIAN markets.

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 Definition
• Target costing is a disciplined process for
determining and realizing a total cost at
which a proposed product with specified
functionality must be produced to generate
the desired profitability at its anticipated
selling price in the future.

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 Target costing is a formal process to achieve
the company’s profitability goals by,
 Determining a price point (or range of prices)for an
approximation combination of features and benefits.

 Subtracting a desired profit from the market price to

determine the maximum bearable level of costs.

 Iterating the product design-eliminating or reducing

unnecessary attributes with costs that can’t be recovered in
higher prices-until the cost target is met.

 Revising the market price for the redesigned product in view

of changed market conditions.

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 STAGES IN TARGET COSTING

 Identifying the product that satisfies the

needs of the potential customers.

 Reaction of the competitors.

 Determination of target price.

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 Cont..

 Determination of target operating income

per unit.

 Deriving target cost per unit

 Application of value engineering

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 Features of Target
Costing Process
 It is an integral part of the design and
introduction of new products.

 A target selling price is determined using

various sales forecasting techniques.

 Establishment of target production

volumes.
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 Features (continued…)

Determine cost reduction targets.

A fair degree of judgement.

A series of intense activities.

A team-based set up to achieve its objectives.

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OBJECTIVES
To lower the costs of new products so
that the required profit level can be
ensured.

It emphasizes understanding the market

and competition

To motivate all company employees to

achieve the target profit

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 ADVANTAGES
• Reduces development cycle of a product.

• Reduces cost of products.

• It enables the organization to face & stay in the

ever growing competitive environment.

• It aligns cost of features with consumers’

willingness to pay.
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 Cont..
 It reinforces the commitment for
INNOVATION.

 It gives the consumers “MAX.

SATISFACTION”.

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 Problems
 Development of process can be
lengthened.

 A large amount of cost cutting can result in

finger pointing.

 Sometimes difficult to reach a conclusion.

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 Cost accountants role in a target
costing environment:
• The cost accountant (c.a) should be able to provide the design team a
series of cost estimates based on initial design sketch, activity based
costing reviews of production processes, and ‘best guess” costing
information from suppliers based on estimated production volumes.

*c.a should be responsible for any capital budgeting requests

generated by design team since he has the knowledge of capital
budgeting process.

*c.a should help understand a design team the nature of various

costs and cost benefit trade-offs of using different design or cost
operation.
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 Cont..
 *c.a is responsible for bridging the gap between current cost and
target cost which is a design teams goal providing an itemisation
where cost saving has already been and where it is yet to be done
and where there is no sufficient degree of progress.

 c.a must continue to compare a products actual cost after a

design is completed and till the company sells the product .
 Impact of target costing (t.c) on profitability:*profitability is
affected depending on the commitment of management to its
use ,constant involvement of a c.a in a product’s life cycle, and
type of strategy the orgn. follows .

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 Profitability can be improved in two
ways:
 It places detailed continuing emphasis on product
costs throughout the life cycle of every product.
 Through precise targeting of correct prices at which
company feels it can place a profitable product in the
market place that will sell in a robust manner as
against the earlier cost plus method.

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 Companies using Target
Costing
• Companies that use target costing : Although it is a relatively
new concept, it is being used heavily in most large companies
especially automotive and aerospace industry.
e.g:
 General Electric
 Motorola
 U.S auto companies G.M
 Ford and Diamler Chrysler.
Japan’s auto companies Toyota Honda ,Nissan , Mitsubishi
 Nasa
 U.S Military
 Sony.
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