Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Target Analysis


Published on

For MBA Finance Students

Published in: Business, Design
  • Be the first to comment

Target Analysis

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