Target costing is a cost management approach used in industries like machinery, chemicals, and steel manufacturing. It starts with determining the price customers are willing to pay, then sets a target cost by subtracting the desired profit from the price. Companies use value engineering and cross-functional teams to design products that meet the target cost through methods like redesigning components, finding cheaper suppliers, and improving production processes with kaizen. The goal is to continuously reduce costs while maintaining product functionality and customer expectations.

1. Target costing
DOSEN PEMBINA
LILIS PUSPITAWATI,SE.,M.Si

2. Target Costing Background
 Global competition
 Increased customer expectations
 Competitive pricing

3. The firm has two options for reducing costs to a target cost level
 By integrating new
manufacturing
technology, using
ABC and seeking
higher productivity
 By redesigning the
product or service

4. % Industri Jepang yang Menggunakan Target Costing
 Food
14%
 Textiles
17%
 Paper & Pulp
0
 Chemical
31%
 Oil, Rubber, Gas
36%
 Steel
23%
 Nonferrous metal
53%
 Machinery
83%

5.  Shahid L. Ansari, Jane, E. Bell and the CAM-I Target
Cost Core Group (1997, hal 7) : target costing process is
system of profit planning and cost management that is
price led, customer focused, design centered and cross
functional.
 Hansen and Mowen (2000, hal 509) : target cost is the
difference between the sales price needed to capture a
predetermined market share and desired per-unit profit.
 Morse, Davis dan Hartgraves (2000, hal 380) : target
costing is a proactive approach to cost management.
Target costing starts with determining what customers
are willing to pay for a product or service and then
subtracts a desired profit on sales to determine the
allowable, or target, cost of product or service.
Defines of Target Costing

6. Characteristics of target costing
 It is used at planning
and design stages
 It is cost planning, not
cost control.
 It is used mainly for
assembly-oriented
industries
 It is used for
controlling design
specification and
production techniques

7.  Price led costing
 Focus on customer
 Focus on design
 Cross-functional involvement
 Life-cycle orientation
 Value-chain involvement
Principles of Target Costing

8. SETTING TARGET COSTING
 Derive target cost
from profit planning
 Derive target cost
from engineering
planning
 Combine the two
methods

9. Implementing a Target Costing approach
 Determine the market price
 Determine the desired profit
 Calculate the target cost
 Use value engineering
 Use kaizen costing and operational control

10. Value Engineering
 Target costing is used in target costing
to reduce product cost by analyzing
the trade-offs between different types
of product functionality (different types
of product features) and total product
cost
 An important first step in value
engineering is to perform a consumer
analysis during the design stage of the

11. A common type of value engineering
 Functional analysis : analysis of
performance and product cost
 Design analysis : design team prepares
several possible design of the product
 Cost tables : computer-based databases
that include comprehensive information
about the firm’s cost driver
 Group technology : the same part of product
can be used in two or more product

12. Target Costing in Three Japanese Firms
Firm/Industry Functionality Cost Reduction
Approach
Strategy
Olympus/Cameras Increasing rapidly; is
designed in
Value engineering;
concept of distinctive
functionality for the
price point, plus
supportive
functionality
Heavy focus on
managing
functionality;
importance of price
point
Nissan/Auto Rapidly increasing;
easy to add or delete
functionality
Value engineering by
product and by each
component of each
product; then
increase price or
reduce functionality
Prices are set by
desired customer
expectations about
functionality; after
functionality is set,
target cost is used to
find savings,
especially from
suppliers
Komatsu/
Construction
equipment
Static; must be
designed in
Design analysis,
functional analysis,
and productivity
programs
Primary focus is on
cost control rather
than redesign or
functionality analysis

13. The Use of Target Costing in Health Product Manufacturing
Design Analysis Alternative 1 Alternative 2 Alternative 3
R & D Expenditure ($50) $40
Replace the amplifier unit with one having
slightly less power
($50) ($50)
Replace the microphone unit with one of
nearly equivalent sensitivity
($30) ($30) ($30)
Replace toggle power switch with a
cheaper and almost as reliable slide switch
($30) ($30) ($30)
Replace the current inspection procedures
with an integrated quality review process at
each assembly station
($40) ($40) ($40)
Renegotiate contract with supplier of plastic
casing
($20)
Replace plastic earpiece material with
material of slightly lower quality but well
within the user’s expectation for 6 to 10
years use
($20)
Total Savings ($150) ($150) ($150)

14.  The fifth step in target costing is to use
continuous improvement and operational
control to further reduce costs.
 Kaizen occurs at the manufacturing stage so
that the effect of value engineering and
improve design are already in place.
 Kaizen means continual improvement, that
is, the ongoing search for new ways to
reduce costs in the manufacturing process
of a product with a given design and
functionality

15. Price, Cost, Kaizen and Target
Costing
Dollar
Price
(Stable or Falling Price in an intensely
Competitive Industry)
Cost 1
Kaizen to reduce cost
after each product redesign
Cost 2

16. Summary
 Target costing is a philosophy or
pricing approach and cost
management
 Target costing process is system of
profit planning and cost
management that is price led,
customer focused, design centered
and cross functional.
 Target costing is a proactive
approach to cost management

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