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Target Costing Presentation Final

Target costing is a process used to determine the total cost at which a product must be produced to generate the desired profitability at its anticipated selling price. It was developed by Toyota in 1965 and involves setting a target cost by deducting the desired profit from the anticipated selling price. The target cost is then decomposed and cost targets are set for each product element. Key approaches include price-based, cost-based, and value-based targeting. Target costing aims to minimize total lifecycle costs and foster cross-functional collaboration and supplier partnerships. While it can improve cost management and time to market, potential disadvantages include misuse to squeeze suppliers and lengthening product development times.

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357 views19 pages

Target Costing Presentation Final

Target costing is a process used to determine the total cost at which a product must be produced to generate the desired profitability at its anticipated selling price. It was developed by Toyota in 1965 and involves setting a target cost by deducting the desired profit from the anticipated selling price. The target cost is then decomposed and cost targets are set for each product element. Key approaches include price-based, cost-based, and value-based targeting. Target costing aims to minimize total lifecycle costs and foster cross-functional collaboration and supplier partnerships. While it can improve cost management and time to market, potential disadvantages include misuse to squeeze suppliers and lengthening product development times.

Uploaded by

Vivek Mishra
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Target Costing

SNEHA GUPTA AMAR SINGH ABHINANDAN GOGOI ATUL PAL

History
Target costing was invented by Toyota in

1965. Although many manufacturers in Japan are using some target costing methods but methods used by Toyota are considered as more technically advanced. It was first confided when company set itself target for producing a $1000 car(Cooper). Many Companies are using this method like Compaq, Ford, Isuzu Motors, Canon etc.

Definition
O TARGET COSTING is a disciplined process

for determining and realizing a total cost at which a proposed product with specified functionality must be produced to generate the desired profitability at its anticipated selling price in the future.

Formula for Target Costing


O The target costing for a product is calculated by

starting with the product's anticipated selling price and then deducting the desired profit. Following formula or equation further explains this concept:
Target Cost = Anticipated selling price Desired profit

Reasons For Using Target Costing


The target costing approach was developed in recognition of two important characteristics of markets and costs. I. many companies have less control over price than they would like to think. II. most of the cost of a product is determined in the design stage.

Target Cost Concept


Determine Customer Wants and Price Sensitivity Planned Selling Price is Set

Target Cost is Determined As: Selling Price Less Desired Profit Teams of Employees from Various Areas and Trusted Vendors Simultaneously Determine Manufacturing Determine Necessary Process Raw Materials Costs are Considered Throughout this Process. The Process Requires Trade-offs to Meet Target Costs Once Target Cost is Achieved the Manufacturing Begins and Product is Sold

Design Product

Target costing objectives


O 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. O To decompose the production process and then to set cost targets for each product element.

Approaches to target costing


O Price-based targeting O Cost-based targeting

O Value-based targeting

Price-based targeting
O Sets target cost for the product through comparison with

that of competitors O 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
O It sets the cost 1st, then the desired profit

margin is derived at the price of the product. O This method requires the suppliers to reveal the very details of their cost structure and will sour the buyer-supplier relationships so itsnt good for the long run.

Value-based targeting
O It sets the price by what it thinks the

market will value the product O After that, the producer sets the desired profit margin and then tries all ways to keep the cost below that of the target cost.

Control Points
Top management in case of establishing a new product Cost estimating group decomposing the preset value

Cross-functional target costing teams analysing the production 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 Focus on design ~ cost control must occur before production

3.

4.

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

5.

6.

ADVANTAGES
O Proactive approach to cost management. O Orients organizations towards customers. O Breaks down barriers between departments.

O Implementation enhances employee awareness and


O O O O

empowerment. Foster partnerships with suppliers. Minimize non value-added activities. Encourages selection of lowest cost value added activities. Reduced time to market.

Negative points
O possible misuse of the technique.

Producers might make use of cost-based target costing to squeeze the profit margins of suppliers, thereby getting materials at the lowest cost possible. O the stress on the design team of companies using target costing O disadvantage to the company. Product development time might be lengthen as product is repeatedly designed to bring cost below that of target.

OTHANK YOU

FOR ATTENTION

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