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Target Analysis

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For MBA Finance Students

For MBA Finance Students

Published in: Business, Design
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  • 1.
    • A method of profit planning and cost management that focuses on products with discrete manufacturing processes
    • Its goal is to design costs out of products in the RD&E stage of a product’s total life cycle
      • Rather than trying to reduce costs during the manufacturing stage
    • It is a relevant example of:
      • How a well-designed MACS can be used for strategic purposes
      • How critical it is for organizations to have a system in place that considers performance measurement across the entire value chain
    By Engineer Sood 7-
  • 2.
    • Begins with market research into customer requirements followed by product specification
    • Companies engage in product design and engineering and obtain prices from suppliers
      • Product cost is not a significant factor in product design at this stage
    • After the engineers and designers have determined product design, they estimate cost
      • Product designers do not attempt to achieve a particular cost target
      • If the estimated cost is considered to be too high, then it may be necessary to modify the product design
    By Engineer Sood 7-
  • 3.
    • Both the sequence of steps and the way of thinking about determining product costs differ significantly from traditional costing
    • Although the initial steps appear similar to traditional costing, there are some notable differences:
    • First, marketing research under target costing is not a single event as it often is with the traditional approach
      • While customer input is obtained early in the marketing research process, it is also collected continually throughout the target costing process
    By Engineer Sood 7-
  • 4.
    • Second, much more time is spent at the product specification and design stage
      • To minimize design changes during the manufacturing process when it is far more expensive to implement
    • Third, the total-life-cycle concept is used by making it a key goal to minimize the cost of ownership of a product over its useful life
      • Not only are costs such as the initial purchase price considered, but also the costs of operating, maintaining, and disposing of the product
    By Engineer Sood 7-
  • 5.
    • After these initial steps, the target costing process becomes even more distinctive
    • Determining a target selling price and target product volume depends on the company’s perceived value of the product to the customer
    • The target profit margin results from a long-run profit analysis, often based on return on sales
      • Return on sales is the most widely used measure because it can be linked most closely to profitability for each product
    • The target cost is the difference between the target selling price and the target profit margin
    By Engineer Sood 7-
  • 6.
    • Once the target cost has been set, the company must determine target costs for each component
    • The value engineering process includes examination of each component of a product to determine whether it is possible to reduce costs while maintaining functionality and performance
      • In some cases, product design may change, materials used in production may need replacing, or manufacturing processes may require redesign
    • Several iterations usually are needed before it is possible to determine the final target cost
    By Engineer Sood 7-
  • 7.
    • Two other differences characterize the process
    • First, cross-functional teams made up of individuals representing the entire value chain guide the process throughout
      • From both inside and outside the organization
    • A second difference is that suppliers play a critical role in making target costing work
      • If there is a need to reduce the cost of specific components, firms will ask their suppliers to find ways to reduce costs
    By Engineer Sood 7-
  • 8.
    • Some studies of target costing in Japan indicate that there are potential problems in implementing the system
      • Especially if focusing on meeting the target cost diverts attention away from the other elements of overall company goals
    • Companies may find it possible to manage many of these factors
    • Organizations interested in using the target costing process should be aware of them before attempting to adopt it
    By Engineer Sood 7-
  • 9.
    • Conflicts can arise between various parties involved in the target costing process
      • Excessive pressure on subcontractors and suppliers to conform to a schedule and reduce costs can lead to alienation and/or failure of the subcontractor
      • Design engineers may become upset when other parts of the organization are not cost conscious
        • They argue that they exert much effort to squeeze pennies out of the cost of a product while other parts of the organization (administration, marketing, distribution) are wasting dollars
    By Engineer Sood 7-
  • 10.
    • Employees in many Japanese companies working under target costing goals experience burnout due to the pressure to meet the target cost
      • Burnout is particularly evident in design engineers
    • Development time may increase because of repeated value engineering cycles to reduce costs
      • May lead to the product coming late to market
      • For some types of products, being six months late may be far more costly than having small cost overruns
    By Engineer Sood 7-
  • 11.
    • Similar to target costing in its cost-reduction mission
    • However, it focuses on reducing costs during the manufacturing stage of the total life cycle of a product
    • Kaizen is the Japanese term for making improvements to a process through small, incremental amounts rather than through large innovations
    By Engineer Sood 7-
  • 12.
    • Kaizen costing’s goal is to ensure that actual production costs are less than the prior year cost
    • Kaizen’s goals are reasonable
      • The product is already in the manufacturing process, thus it is difficult and costly to make large changes to reduce costs
    • It is tied to the profit-planning system
    • If the cost of disruptions to production are greater than the savings due to kaizen costing, then it will not be applied
    By Engineer Sood 7-
  • 13.
    • The system places enormous pressure on employees to reduce every conceivable cost
      • Some Japanese automobile companies use a grace period just before a new model is introduced
      • This cost-sustainment period provides employees with the opportunity to learn any new procedures before the company imposes kaizen targets on them
    • Kaizen costing leads to incremental rather than radical process improvements
      • This can cause myopia as management tends to focus on the details rather than the overall system
    By Engineer Sood 7-

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