Target Costing

Maria Osipova Inna Dueck Tatiana Volina Ivan Kraynev Vladimir Alferov

History
Target costing was invented by Toyota in 1965 Reasons: 80-90% of the life cycle cost is determined at the design phase of the product (Tanaka) continuous improvement, cost kaizen, inevitably lead to fewer opportunities to cut costs (Tanaka)

SOLUTION: actual costs -> predetermined costs

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.

TARGET-COSTING PRINCIPLES
1. 2. 3.

4.
5.

6.

price-led costing. focus on customers. focus on design. cross-functional involvement. value-chain involvement. a life-cycle orientation..

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

A target cost is the maximum amount of cost that can be incurred on a product. Target Cost = Market Price Expected Margin

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 product-line complexity. Selecting appropriate product and process technologies. Lowering product design late in the innovation process. Eliminating cost overruns.

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.

Three main elements of the target costing process by Cooper & Slagmulder

Implementation
1.

Price-led costing ~ market prices are used to determine target costs Focus on customers ~ value to the customer must be greater than the cost of the product itself Focus on design ~ cost control must occur before production

2.

3.

4.

Cross-functional involvement ~ interfunctional product and process teams Value-chain involvement ~ all members of the value chain included Life-cycle orientation ~ minimizing total lifecycle costs

5.

6.

Control Points
Top management in case of establishing a new product
Cost estimating group decomposing the preset value Cross-functional target costing teams analysing the production process

Similar approach to the target costing by Caterpillar

The main aim: to reduce costs by 5.4% The cost of the comparable model is based on current manufacturing capabilities

Similar approach to the target costing by Caterpillar

cross-functional organizational team emphasize cost reduction during the new product development cycle reduce costs through efficiency improvements

Caterpillar

Similar approach to the target costing by Caterpillar

A few areas of reduction: Assembly Cab Engine Hydraulics Power Train Structures Linkage

Other

Target costing prospectives

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)

Thank you for attention