target costing 15th may

target costing 15th may - Transcript

TARGET COSTING A Case for Action
Global competition Technology leadership no longer provides lasting competitive edge Pressure for lower prices Shorter product life cycles Demand for custom products

Global competitiveness requires balancing quality cost and time
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TARGET COSTING The new competitive environment

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Time
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Target costing focuses on all three dimensions of the strategic triangle

History
Target costing was invented by Toyota in 1965 Reasons 80 90 of the life cycle cost is determined at the design phase of the product continuous improvement cost kaizen inevitably lead to fewer opportunities to cut costs SOLUTION actual costs predetermined costs

TARGET COSTING State of the Art in the U S
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US Companies
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Japanese Companies
100 used price minus profit Achieve 80 accuracy of cost estimates at product concept stage Estimate of sales volume provided to suppliers are within 5 Tight monitoring of profits costs capital investment quality development budget and performance

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67 use cost plus pricing Cost estimates need great improvements Estimate of sales volume provided to suppliers are overstated between 11 25 No tight monitoring of profits costs capital investment quality development budget and performance

TARGET COSTING A Different Profit Planning Approach
y Cost
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Plus
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Market considerations not part of cost planning Costs determine price Waste and inefficiency is focus of cost reduction efforts Cost reduction is not customer driven Cost accountants manage costs Suppliers involved after product designed Minimizes initial price paid by customer Little or no involvement of value chain in cost planning

Target Costing Competitive market considerations

drive cost planning Price determines costs Cost reduction is achieved by simultaneous product process design Customer input guides cost reduction Cross functional teams manage costs Suppliers involved in concept and design of product Minimizes cost of ownership to customer Involves the value chain in cost planning

TARGET COSTING Voice of the Customer
Develop a market focused mindset
Open minded inquisitive take nothing for granted share what you learn

Solicit customer information
Panels focus groups interviews surveys

TARGET COSTING Who Participates
Major cross functional teams

Business Planning Team Product Team Design Team Product Manufacturing

Definition Target Costing is defined as a cost management tool for reducing the overall cost of a product over its entire life cycle with the help of production engineering research and design

Target Costing Characteristics
Contradicts the traditional approach design product determine cost set price Intense customer focus
What do they want How much will they pay for it

Can we make a profit on it Want answers to these questions before committing to the project

Value Engineering The aim of VE is to achieve the assigned target cost by 1 Identifying improved product design that reduce product cost without sacrificing functionality 2 Eliminate unnecessary functions that increase product s costs and for which 3 VE requires the use of functional analysis Attributes style comfort quality reliability Surveys and interviews with the customers The cost of each function of a product is compared with the benefits perceived by the customers If the cost exceeds benefits then function should be eliminated or modified to reduce cost or enhanced in terms of perceived value so that the value exceeds cost

Make the Decision

Begin

Value engineering

Yes

Repeat value engr No Abort project

No

Close enough Yes

No

Achieve target cost Yes

Release design for production

TARGET COSTING PRINCIPLES
1 price led costing 2 focus on customers 3 focus on design 4 cross functional involvement 5 value chain involvement 6 a life cycle orientation

Target costing objectives
To identify the cost at which the product must be manufactured if it s to earn its target profit margin at its expected or target selling price To decompose the production process and then to set cost targets for each product element

Approaches to target costing
Price based targeting Cost based targeting Value based targeting
A target cost is the maximum amount of cost that can be incurred on a product Target Cost Market Price Expected Margin

Price based targeting
Sets target cost for the product through comparison with that of competitors This means setting the price of the product by observing what the market will bear then deducting the desired profit margin from the price and thereby obtaining the target cost

Cost based targeting
It sets the cost 1st then the desired profit margin is derived at the price of the product This method requires the suppliers to reveal the very details of their cost structure and will sour the buyer supplier relationships so itsn t good for the long run

Value based targeting
It sets the price by what it thinks the market will value the product After that the producer sets the desired profit margin and then tries all ways to keep the cost below that of the target cost

Benefits
Delivering the optimal value proposition to end customers Minimizing product line complexity Selecting appropriate product and process technologies Lowering product design late in the innovation process

Implementation
1 Price led costing market prices are used to determine target costs 2 Focus on customers value to the customer must be greater than the cost of the product itself 3 Focus on design cost control must occur before production

4 Cross functional involvement interfunctional product and process teams 5 Value chain involvement all members of the value chain included 6 Life cycle orientation minimizing total lifecycle costs

Life cycle costing
Accumulate and manage costs over the life cycle of the product Four stages of the product life cycle
Product planning and initial concept design Product design and development Production Distribution and customer logistic support

Life cycle budgeting
Involves estimating the expected costs and revenues for each year of the expected life of a product Useful in product mix or pricing decisions

Managing costs through a life cycle costing
A lack of awareness or uncertainty about how to calculate life cycle costs Not easy for products with longer lives as it is more difficult to assess
Changes in consumer tastes Impact of competitors actions Effects of inflation

Key features of target costing for cost management
It is price led Focuses on the customer and customer expectations Based on principles of life cycle management placing primary emphasis on managing downstream and manufacturing costs Cross functional involving managers from across the value chain

Managing time
Time dictates the rate at which products are produced and revenue generated Time determines how long resources are tied up in processes and unavailable for other uses Time delays lead to inventory build ups Time to develop new products and delivering products to customers may be key to innovation

Time based management
Time take to fulfil a customer s order
Measures of customer response time order receipt time production lead time cycle time

Reliability in meeting scheduled delivery dates

Managing throughput
The theory of constraints
Focuses on identifying and removing bottlenecks to improve the rate of throughput Recognises the rate of production is limited to the capacity of the constraints or bottlenecks that exist Cycle time amt of time spent between receipt of order and delivery of order Redesign the manufacturing process for flexibility and fast cycle time