target

costing
 Definition

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
Keeping track of external market forces
tc which can enable attain desirable market share
team of engineers, designers, marketing, costing…
 nature of target costing

Design
Type of Product

Cost
Technical Specification

Technical Requirements

Customers Needs
Market
Resource Consumption (Acq Price) Price
 target costing methodology

Manage Upstream Provide frame work

of strategic targets
During product to guide
Planning & designing managing down stream

Marketing & Customer

R&D Design Manufacturing
Distribution Service

Upstream Activities Downstream Activities

(before Manufacturing) ( After Manufacturing)
 target costing methodology

Manage Upstream Provide frame work

of strategic targets
During product to guide
Planning & designing managing down stream

Concurrent Engineering
Analysis of market forces
Customers Needs
Relevant Technology
Competitors Models
Product Configurations &
Performance features
Design alternatives
Process capabilities
Maintenance & Service Requirements
Life cycle costs
 Target Costing

Price led Cross-functional

costing teams
Key
Life-cycle principles Value-chain
costs of target orientation
costing
Focus on Focus on
process product
design Focus design
on the
customer
 Target Costing Analysis reveal innovative
possibilities in several in several areas
especially for

End result is a
Reducing Product Design
Which can

Cycle time for design Face Competition

Cycle time for development Guarantee target
Profit
Cycle time for manufacturing & service
Target Cost against
Costs for design, development
Costs for manufacturing & service
Number of total Parts per model
Rate of redesign, rework and repair
 Target Costing

Product
Business Market
Plan Strategies
 Steps in target costing--summary

Value added
Product By each
Customer
Needs
Performance Feature &
Features
Component

Choose a product Design

Choose With assured target profit
Choose Cost target for each
Manufacturing
Suppliers assuring component
Design assuring
Target cost
target costs

Monitor
Conduct VE to Product performance
Cost Review Reduce Target Costs Cost & Profit
Target Price
 target costing Methodology

1Customer
Requirements &
Gathering
Market Information

Product features
Product pricing
Product Quality
Product Availability
Product performance
Product delivery
Product Service
 target costing Methodology

2 Documenting
Customer
Requirements

Product Characteristics
Competitor Performance Comparisons
Target Performance Values
Customer Rating Comparisons
Data
from

Customer Surveys
Experience with Previous
Products
Market Research Studies
Engineering Studies
Calculations & Modellng
Experimentation
 target costing Methodology

3 Comparing
Competitors
Products

Market
Global Upcoming
Leader

Product

Price & Performance

Parameters similar for
New Product Planned
 target costing Methodology

3 Comparing
Competitors Price & Performance
Products Parameters similar for
New Product Planned

Data used
For
Decision be
Based On

Customer Input
Comparative Test Data
Published Performance
Specifications
Annual Reports
Trade shows
Other external Sources
 target costing Methodology

3 Comparing
Competitors Competitor
Products Information

Annual Reports
Marketing Brochures
Commercial Data base
Newspapers
Magazines
Other Publications
4 performance
Testing

Several Samples of
Each product for
Performance Testing
&
Reverse Engineering
5 Applying
Reverse
Engineering Reverse engineering can be viewed
as the process of analyzing a system to:

Identify the system's components and their

interrelationships

Create representations of the system in

another form or a higher level of abstraction

Create the physical representation of that system

Team having experts from

Manufacturing, designing, industrial Engineering ,procurement, Estimating
5 Applying
Reverse RE consist of estimating the
Engineering following

The type of Manufacturing

Processes used for each
component

The time required to

Manufacture each
component

The manufacturing
Philosophy
Of each competitor
6 Cost Structure
Analysis

Internal cost of existing

products
Competitors cost of similar
products
Categorizing according
to cost drivers
Comparative Ratios
Projected costs
Best practices
7 Value Engineering

Current cost of Product

Various features of Product
Improvement required
Value given by each function
What modification
Cost reduction
Product improvement
 Value Engineering
and Target Costing
Target cost information
 Product design
 Product costs
 Production processes

Value Engineering
 Cost reduction
 Design improvement
 Process improvement
target costing-Methods

1 Subtraction Method

2 Addition Method

3 Integrated Method
 target costing-Methods

1 Subtraction Method

Based on competitors’ price, where the target cost

is worked backwards from the market price. The
Target result may represent a very rigorous target and
may be difficult to achieve
 target costing-Methods

2 Addition Method

Based on the existing technology and past cost

data of the company. It is achievable but ignores
Market Conditions.
 target costing-Methods

3 Integrated Method

Integration of Subtraction & Addition Methods

?