Target costing

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Target costing

  1. 1. Target Costing By: Sainatth Wagh
  2. 2. Definition Target Costing (TC) is defined as a cost management tool for reducing the overall cost of product over its entire life cycle with the help of the production, engineering, R&D…..Intent of target costingReduction in costPlanning & designing high quality productsMeeting customers needsUsing value engineering to target costAttain target cost using standard costTC which can enable attain desirable market share
  3. 3. Nature of Target Costing Design Type of Product Cost Technical Specification Technical Requirements Customers Needs MarketResource Consumption (Acq Price) Price
  4. 4. Target CostingPrice led Cross-functional costing teams KeyLife-cycle principles Value-chain costs of target orientation costing Focus on Focus on process product design Focus design on the customer
  5. 5. Target costing-Methods1. Subtraction MethodBased on competitors’ price, where the target cost is worked backwards fromthe market price. The target result may represent a very rigorous target and maybe difficult to achieve.2. Addition MethodBased on the existing technology and past cost data of the company. It isachievable but ignores Market Conditions.3 Integrated MethodIntegration of Subtraction & Addition Methods
  6. 6. Steps in Target Costing-Summary Value added Product By each Customer Performance Feature & Needs Features Component Choose a product Design Choose With assured target profit Choose Cost target for each ManufacturingSuppliers assuring component Design assuring Target cost target costs Monitor Conduct VE to Product performanceCost Review Reduce Target Costs Cost & Profit Target Price
  7. 7. Achieving the Target Cost- Ex. PumpEXHIBIT 1CUSTOMER REQUIREMENT RANKINGS Less Ranking More Raw % of Total Competitive Customer Requirement Important Important Score Raw Score Comparison 1 2 3 4 5 1 2 3 4 5Multiple speeds 4 4 14.8%Horizontal oscillation 3 3 11.1%Vertical oscillation 1 1 3.7%Light weight 4 4 14.8%Adjustable height 1 1 3.7%Airflow capacity 4 4 14.8%Quietness 5 5 18.5%Compact size 3 3 11.1%Looks nice 2 2 7.4%Total 27 100% Us Competitor Both
  8. 8. Achieving the Target Cost- Ex. PumpEXHIBIT 2COST GAP BREAKDOWN BY LIFE CYCLE AND VALUE CHAIN Value Chain Life Cycle Internal Costs External Costs Total Costs Target Current Gap Target Current Gap Target Current GapResearch and development $ 0.30 $ 0.50 $ 0.20 $ 0.30 $ 0.50 $ 0.20Manufacturing 4.00 5.00 1.00 $ 13.00 $ 15.00 $ 2.00 17.00 20.00 3.00Marketing and distribution 1.50 2.00 0.50 4.50 5.00 0.50 6.00 7.00 1.00Service and support 0.25 0.50 0.25 0.25 0.50 0.25General administration 0.75 1.00 0.25 0.75 1.00 0.25Total $ 6.80 $ 9.00 $ 2.20 $ 17.50 $ 20.00 $ 2.50 $ 24.30 $ 29.00 $ 4.70
  9. 9. Achieving the Target Cost- Ex. PumpEXHIBIT 3COMPONENT COST BREAKDOWN Percent of Component Function Cost total costMotor Turns blade $ 8 40%Transmission Provides oscillation capabilities 4 20%Speed control/switch Controls blade speed 3 15%Body Houses motor, transmission, speed control 2 10%Blade Moves air 1 5%Blade guard Protects blade from contacting objects 2 10%Total $ 20 100%
  10. 10. Achieving the Target Cost- Ex. PumpEXHIBIT 4QUALITY-FUNCTION-DEPLOYMENT (QFD) MATRIX Components Customer Requirements Speed Blade Motor Transmission control Body Blade guardMultiple speedsHorizontal oscillationVertical oscillationLight weightAdjustable heightAirflow capacityQuietnessCompact sizeLooks nice Strong correlation Moderate correlation Weak correlation
  11. 11. Achieving the Target Cost- Ex. PumpEXHIBIT 5COMPONENT CONTRIBUTION TO CUSTOMER REQUIREMENTS Components Customer Requirements Speed Blade Motor Transmission control Body Blade guardMultiple speeds 40 X 14.8 = 5.92 60 X 14.8 = 8.88Horizontal oscillation 80 X 11.1 = 8.88 20 X 11.1 = 2.22Vertical oscillation 80 X 3.7 = 2.96 20 X 3.7 = 0.74Light weight 70 X 14.8 = 10.36 10 X 14.8 = 1.48 20 X 14.8 = 2.96Adjustable height 100 X 3.7 = 3.70Airflow capacity 50 X 14.8 = 7.40 50 X 14.8 = 7.40Quietness 40 X 18.5 = 7.40 60 X 18.5 = 11.10Compact size 5 X 11.1 =0.56 5 X 11.1 =0.56 30 X 11.1 =3.33 30 X 11.1 =3.33 30 X 11.1 =3.33Looks nice 50 X 7.4 = 3.70 50 X 7.4 = 3.70Total contribution percentage 31.64% 13.88% 8.88% 16.65% 21.83% 7.03% Contribution weight assigned to the component (Correlation) X Importance to the customer (Raw Score from Exhibit 1)
  12. 12. Achieving the Target Cost- Ex. PumpEXHIBIT 6CALCULATION OF VALUE INDICES FOR COMPONENTS Percent of Contribution Component Total Cost Percentage Value Action (Exhibit 3) (Exhibit 5) Index ImpliedMotor 40% 31.64% 1.26 Reduce costTransmission 20% 13.88% 1.44 Reduce costSpeed control 15% 8.88% 1.69 Reduce costBody 10% 16.65% 0.60 ImproveBlade 5% 21.83% 0.23 Improveblade guard 10% 7.03% 1.42 Reduce cost
  13. 13. Make the Decision Begin Value engineering Repeat AchieveYes No Close No value target enough? engr.? cost? Yes Yes No Abort project Release design for production
  14. 14. Thank You

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