MADIII_Target Costing

Target Costing

Concept

Definition: Target costing is a cost management tool used during the planning cycle and drives the process of choosing product and process designs that will result in a product that can be

produced at a cost that will allow an acceptable level of profit,

given the product’s estimated market price, selling volume, and target functionality.

Characteristics

Planners use it during product and process design to drive improvement efforts aiming at reducing the product’s future manufacturing costs.

It is a tool that promotes and facilitates communication among the members of the cross-functional team that is responsible for product design.

It is customer-oriented. The process begins with price, quality, and functionality requirements defined by customers.

It is a price-led costing, while traditional form is cost-led pricing.

Forces consideration of manufacturability. Reduce the needs for subsequent change

Customer Orientation (set price, quality, and functionality)

Estimate of product’s Price, reflecting product’s function, attributes, and competitive forces.

Approach: Notion of Value. (E.g. Increase consumer value)

Increase product’s functionality, and hold price constant

Reduce Price, and hold functionality constant

Target Price reflects asset of product functions that the product must deliver to the customer.

Two critical elements:

1)The consumer/ or market defines the price that will be paid for the product

and its designated function.

2)If there is a market for the same product with different functions, the

organization can choose which product functions to supply, but the

consumer/market will choose a price that reflects the set of product

functions supplied.

Target Costing Process

Target Cost = target selling price –target profit

Target costing process is repeated and continues until the design team finds a product design with a projected cost that meets the target costs.

1.Strength:

1)Major strength is that target costing is embedded in a team environment.

•It is a concurrent design process, which the design team members including representatives from design, process engineering, purchasing,

manufacturing, and marketing.

•All members of design team focus the same object: To deliver a product with the target functionality, quality, and price to specific market

→This strength can reduce product development time and cost reduction targets that it is expected to meet in order to achieve the

team’s overall target cost objective.

→And each subgroup within the team is assigned cost reduction targets that it is expected to meet in order to achieve team’s overall

target cost object

2)Target costing is deployed at a time, the product and process design phase,

when design choices can have a maximum impact on a product’s cost.

•Without the discipline of a team approach to product design, an engineering group might design a production process that uses the latest

production technology without regard for its effects on cost or

manufacturability.

3)to encourage a focus on the customer

4)Better process understanding

2.Problem

1)Too much customer focus

2)Potential organizational conflict

3)Too much pressure on the designed team

4)Longer development times

How to use Target Costing

BMW is reputed for its fast innovation, high quality, and handling.

BMW want to be the ultimate driving machine.

Organization needs to keep redesigning to match the requirement of the consumer and at a consumer acceptable price by a BMW allowable cost.

Moreover, as 80% of a product’s costs are committed during the product planning and design stage, focus on this stage to engineer out costs from the beginning saves costly changes later on.

Control the cost in this phase is crucial for the organization’s success.

→Based on this dimension, target costing can benefit BMW a lot.

Reverse to the traditional cost-let pricing, target costing begins with the price, quality, and functionality requirements of the customers, which is a price-let costing.