presentation on very important topic of economics and finance

1. TARGET COSTING

2. TOPICS COVERED
• Introduction of Target Costing
• Steps in Target Costing
• Comparison of traditional method and target costing
• Objectives of target costing
• Target costing process
• Features of target costing process
• Advantages of target costing
• Techniques of target costing

3. INTRODUCTION OF TARGET COSTING
• Origin – Target costing has emerged in Japan in 1960s as a consequence
of difficult market conditions. In Japan, target costing has gained
importance and widely practiced in more than 80% of the companies in
the assembly industry and more than 60% of the companies in processing
industry.
• Concept of target costing – Three major C's which affect demand and
supply of a product are Customer. Competitor and Cost. Earning profits
and customer satisfaction are the major goals of any firm and they are
achievable only when cost of production is less. Target Costing system is
based on this concept. Target costing based on market based pricing of a
product depends on Target price, which potential customer will pay for a

4. • Target costing can be defined as "a structured approach for
determining the cost at which a proposed product with specified
functionality and quality must be produced to generate a desired level
of profitability at its anticipated selling price". It is an important part of
a comprehensive management process aimed at helping a firm to
survive in an increasingly competitive environment.
• Cooper has defined of target costing as follows: 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. CIMA defines target cost us "a product cost estimate derived
from a competitive market price“
• Target Costing is a disciplined process that uses data and information
in a logical series of steps to determine and achieve a target cost for

5. STEPS IN TARGET COSTING
Main steps involved in target costing are explained as under:
1. To conduct market research
2. Determining the price, margin and cost feasibility.
3. To meet margin target by design improvement.
4. To implement continuous improvement.
Set target selling
price based on
customer
expectations and
sales forecast
Establish profit
margin based on
long term profit
objectives and
projected
volumes
Determine target cost per
unit (target selling price
less required profit
margin )
Compare
with
Estimate the
current cost
of the new
product
Establish cost reduction
targets for each
component and the
production activities
using value engineering
and value analysis

6. COMPARISON OF TRADITIONAL METHOD AND TARGET
COSTING
TRADITIONAL METHOD
• Traditionally , manufacturers would make
use of the cost plus approach to estimate
the product price
• If the management and the marketing
department think that the price and cost
are too high, the product design and
engineering process will be repeated till
an acceptable cost is reached, after which,
production will begin.
• The traditional mindset has been that a
product is developed, production cost is
identified and measured, a selling price is
set, and either profits or losses will result.
• Cost is dependent on manufacturing
TARGET COSTING
• Target costing derives an "allowable" product
cost by first carrying out market research to
predict what the market segment is willing
to pay for the desired product with specific
characteristics.
• Target costing can be viewed as a system of
profit planning and cost management that is
customer focused, market price led, design
centered and cross functional.
• In target costing, a product is developed, a
selling price and desired profit are
determined and maximum allowable cost is
derived.
• Cost is dependent on selling prices.

7. OBJECTIVES OF TARGET COSTING
The fundamental objective of target costing is to enable management to use
proactive cost planning, cost management and cost reduction practices
Target costing is primarily used and most effective in the product
development and design stage
Broadly speaking, a target costing system has three objectives:
• To lower the costs of new products so that the required profit level can
beensured by establishing a maximum target cost by working backward
from an estimated market price.
• The new products meet the levels of quality, delivery timing and
pricerequired by the market.
• To motivate all company employees to achieve the target profit duringnew
product development by making target costing a company wide
profitmanagement activity.

8. TARGET COSTING PROCESS
General steps in target costing process that are followed mostly by
all companies :
• Establishing the target price in the context of market needs and
competition
• Establishing the target profit margin
• Determining the allowable cost that must be achieved; this cost
should motivate all personnel to achieve
• Calculating the probable cost of current products and processes

9. Once the target cost has been calculated, companies take the
following steps to achieve it:
• Establishing a cross functional team, which is involved in the
implementation process from the earliest design stages
• Using tools such as value engineering in the design process
• Pursuing cost reductions using "kaizen costing" once production
has started.
Define
the
product
Set the
target
Achieve
the target
Maintain
competitiv
e cost

10. FEATURES OF TARGET COSTING PROCESS
• Target costing is a integral part of the design and introduction of new
products : it is part of an overall profit management process.
• In target costing process, target selling price of a product is determined
using various sales forecasting techniques.
• Integral to setting the target selling price is the establishment of target
production volumes, given the relationship between price and volume
• Determination of cost reduction targets is an important feature of target
costing process
• Helps in making judgment when allowable cost and targeted cost differ
• A series of activities to translate the cost challenge into reality.
• To achieve the objectives of target costing, a team-based set up is
required that integrates essential disciplines such as marketing,
engineering, manufacturing purchasing and finance.

11. ADVANTAGES OF TARGET COSTING PROCESS
• It reinforces top to bottom commitment to process and product innovation to
achieve some competitive advantages.
• It helps to create a company's market-driven management for designing and
manufacturing products that meet the price required for the market success.
• Assures that products are better matched to their customers' needs.
• Aligns the costs of features with customers' willingness to pay for them.
• Reduces the development cycle of a product.
• Reduces the costs of products significantly.
• Increases the teamwork among all internal organizations associated with
conceiving, marketing, planning, developing, manufacturing, selling, distributing
and installing a product.
• It helps to retain or increase in company's market by aligning the products with
customer needs
• It provides team spirit.

12. TECHNIQUES OF TARGET COSTING
Techniques which are normally used for achieving impressing results by using the
target costing process are :
A. TEAR DOWN ANALYSIS - This analysis is also known as Reverse Engineering. It
involves making analysis of a competitor's product in order to identify the
opportunities for product improvement and/or cost reduction. The aim is to
benchmark provisional product design with the design of the competitor and
to incorporate any observed comparative advantage of the competitor's
approach to the product design. In case of a successful soft drink produced by
a leading business group, the tear down analysis was conducted to find out the
competitor's strengths and weaknesses and after studying them, necessary
improvements were made in the product.

13. B. VALUE ENGINEERING : Value engineering also known as value analysis is a
systematic interdisciplinary examination of factors affecting the cost of a product
or service in order to devise means of achieving the specified purpose at the
required standard of quality and reliability at the target cost. The aim of value
engineering is to achieve the assigned target cost by identifying improved design
that reduces the product's cost without sacrificing the functionality and also to
eliminate the unnecessary function that increase the product's cost for which the
customers are not ready to pay. Value Engineering has also been successfully
employed in pharmaceutical automobile sector, in case of four wheelers and two
wheelers.
C. KAIZEN COSTING : Kaizen costing reduces the cost of producing existing products
by finding ways to increase the efficiency of the production processes used in
their manufacture. Kaizen Costing has also been defined as a method of costing
that involves making continuous, incremental improvements to the production
process during the manufacturing phase of the product/ service life-cycle,
typically involving setting targets for cost reduction. In fact the aim of Kaizen is to
reduce the cost of components and products by a specified amount. For effective