bbab8target costingppt

8/8/2019 bbab8target costingppt

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Amity Business School

Target Costing

If you cannot find the time to do it

right, how will you find the time todo it over?


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General Concept

Target cost is the cost that can be incurred

while still earning the desired profit

Selling price desired profit = target cost

The customer sets the price

Profit must be achieved through cost control


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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 beforecommitting to the project


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Cost control from the beginning

70-90% of costs are committed to at the

design stage Focus on product and process design to

engineer out costs from the beginning

Saves costly changes later on


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Product, manufacturing process, delivery

process designed simultaneously Ensures features customers demand, but within

acceptable cost parameters

Eliminates the temptation to add costly features

Customers may not value the added features

Forces consideration of manufacturability

Reduces the need for subsequent changes


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Cost control at all phases of the product life cycle

Design Production

Delivery/setup

Customers cost of ownership

Emphasizes future sales instead of current cost savings

Service and repair Disposal and recycling


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Cross-Functional Team

Marketing

Design/engineering

Manufacturing

Purchasing

Including suppliers

Distribution

Service/support

Cost accounting

Finance

Legal


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Target Costing Process

Two stage process

Establish the target cost Market research

Product planning, concept development stages

Achieve the target cost Value engineering, continuous improvement

Design stage

Continuous improvement in later stages


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Establishing the Target Cost

Determine the product and its market

Who is the target market?

What do they want?

What do competitors offer?

Introduce concept or prototype

Evolutionary or revolutionary?

Refine until it meets customer needs


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Determine the selling price

Must be acceptable to the customer Must be able to withstand competition

Techniques Existing price +/- value of features added or

deleted Consensus of focus group

Price predicted to achieve a desired market share


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Determine the required profit Return on sales

Desired return

Historical return for similar products

Industry average for similar products Return on sales will fluctuate over the life of the

product Price and costs fluctuate


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Product Life Stage

UnitS

ellingP

rice


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Product Life Stage

UnitC

os

t

Gradual decline as volumeincreases

Competitors enter market,

straining supply of resources

Unexpected events affectcost of resources


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Unit price, cost and profit are almost

meaningless because they fluctuate Life cycle totals are more meaningful

Total expected revenue throughout product life

- Total desired profit throughout product life

Total target cost


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Achieving the Target Cost

Rank customer requirements (exhibit 1)

What does the customer want?

How important is each function to the customer?

What do we and our competitors currently offer? Competitive evaluation (exhibit 1)

Do our current product features meet the customer needs?

Are the customers needs met, unmet or exceeded?

What can we learn from our competitors products?


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EXHIBIT 1CUSTOMER REQUIREMENT RANKINGS

Less More Raw % of Total

Customer Requirement Important Score Raw Score

1 2 3 4 5 1 2 3 4 5

Multiple speeds 4 4 14.8%

Horizontal oscillation 3 3 11.1%

Vertical oscillation 1 1 3.7%

Light weight 4 4 14.8%

Adjustable height 1 1 3.7%

Airflow capacity 4 4 14.8%

Quietness 5 5 18.5%

Compact size 3 3 11.1%

Looks nice 2 2 7.4%

Total 27 100%

Us

Competitor

Both

Important

Competitive

Comparison

Ranking


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Determine the cost gap between current costand allowable cost Current cost is based on

Currently used components

Current suppliers Current manufacturing processes

Current distribution network

Etc.


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Decompose the cost gap (exhibit 2)

Life cycle decomposition

Cost reduction goals are divided among the functions in theproducts life cycle

Design/engineering

Manufacturing

Sales/distribution

Service/support

General administration

Etc.


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Value chain decomposition

Cost reduction targets are divided among internal and externalactivities

Internal costs

Labor, overhead, selling and administrative costs, etc.

External costs

Components and services acquired from suppliers, etc.

Often represent a large proportion of total cost


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Amity Business SchoolAchieving the Target Cost

EXHIBIT 2COST GAP BREAKDOWN BY LIFE CYCLE AND VALUE CHAIN

Life CycleTarget Current Gap Target Current Gap Target Current Gap

Research and development 0.30$ 0.50$ 0.20$ 0.30$ 0.50$ 0.20$

Manufacturing 4.00 5.00 1.00 13.00$ 15.00$ 2.00$ 17.00 20.00 3.00

Marketing and distribution 1.50 2.00 0.50 4.50 5.00 0.50 6.00 7.00 1.00

Service and support 0.25 0.50 0.25 0.25 0.50 0.25

General administration 0.75 1.00 0.25 0.75 1.00 0.25

Total 6.80$ 9.00$ 2.20$ 17.50$ 20.00$ 2.50$ 24.30$ 29.00$ 4.70$

Internal Costs External Costs Total Costs

Value Chain


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Perform value engineering to design out costs without sacrificing neededfeatures

Perform a cost analysis of major components and activities

List components or activities and their functions

Calculate a cost breakdown (exhibit 3) Determine the current cost of each component or activity and

convert to percentage of total cost

Costs include materials, labor, overhead, etc.


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Achieving the Target CostEXHIBIT 3COMPONENT COST BREAKDOWN

Percent of

Component Function Cost total cost

Motor Turns blade 8$ 40%

Transmission Provides oscillation capabilities 4 20%

Speed control/switch Controls blade speed 3 15%

Body Houses motor, transmission, speed control 2 10%

Blade Moves air 1 5%

Blade guard Protects blade from contacting objects 2 10%

Total 20$ 100%


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Relate the components to customer requirements (exhibit 4)

Develop Quality-Function-Deployment matrix

Indicates which components have the greatest impact on

customer requirements

Develop a functional ranking (exhibit 5)

Indicates the importance of each component to the customer

Based on the components contribution to providing the desired

functions


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Achieving the Target CostEXHIBIT 4QUALITY-FUNCTION-DEPLOYMENT (QFD) MATRIX

Speed Blade

Motor Transmission control Body Blade guardMultiple speeds

Horizontal oscillation

Vertical oscillation

Light weight

Adjustable height

Airflow capacity

QuietnessCompact size

Looks nice

Strong correlationModerate correlationWeak correlation

Components

Customer Requirements


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EXHIBIT 5COMPONENT CONTRIBUTION TO CUSTOMER REQUIREMENTS

Customer Requirements Speed Blade

Motor Transmission control Body Blade guard

Multiple speeds 40 X 14.8 = 5.92 60 X 14.8 = 8.88

Horizontal oscillation 80 X 11.1 = 8.88 20 X 11.1 = 2.22

Vertical oscillation 80 X 3.7 = 2.96 20 X 3.7 = 0.74

Light weight 70 X 14.8 = 10.36 10 X 14.8 = 1.48 20 X 14.8 = 2.96

Adjustable height 100 X 3.7 = 3.70

Airflow capacity 50 X 14.8 = 7.40 50 X 14.8 = 7.40

Quietness 40 X 18.5 = 7.40 60 X 18.5 = 11.10

Compact size 5 X 11.1 =0.56 5 X 11.1 =0.56 30 X 11.1 =3.33 30 X 11.1 =3.33 30 X 11.1 =3.33

Looks nice 50 X 7.4 = 3.70 50 X 7.4 = 3.70

Total contribution percentage 31.64% 13.88% 8.88% 16.65% 21.83% 7.03%

Components

Contribution weight assigned to the component * importance to the customer(exhibit 1)


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Achieving the Target Cost Identify components for cost reduction

Calculate a value index for each major component (exhibit 6)

Component cost as a percentage of total cost divided bythe components relative importance to the customer

Index greater than 1

Disproportionately high cost in relation to its

importance

Implies cost reduction should be considered

Do not manage by the numbers alone


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EXHIBIT 6CALCULATION OF VALUE INDICES FOR COMPONENTS

Percent of ContributionComponent Total Cost Percentage Value Action

(Exhibit 3) (Exhibit 5) Index ImpliedMotor 40% 31.64% 1.26 Reduce costTransmission 20% 13.88% 1.44 Reduce costSpeed control 15% 8.88% 1.69 Reduce costBody 10% 16.65% 0.60 ImproveBlade 5% 21.83% 0.23 Improve

blade guard 10% 7.03% 1.42 Reduce cost


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Generate cost reduction ideas

Eliminate over-engineering Eliminate, replace, combine, rearrange

Seek ways to accomplish the goal at less cost

Consider the process as well as the product

More efficient manufacturing processes

Better logistics

Etc.


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Achieving the Target Cost Test the ideas

Will they be effective?

Are they technologically feasible?

Is there a domino effect?

Construct a component interaction matrix (exhibit 7)

Do activities interact?

Estimate the achievable costs

Use activity-based costing, cost tables, etc.


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Achieving the Target CostEXHIBIT 7COMPONENT INTERACTION MATRIX

Speed Blade

Component Motor Transmission control Body Blade guardMotor X X

Transmission X XSpeed control XBody X X X XBlade XBlade guard X X


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Amity Business SchoolMake the Decision

Achieve

target

cost?

Close

enough?

Release design

for production

Abort

project

Repeat

value

engr.?

Value engineering

Yes

No

Yes

No

No

Yes

Begin


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Organizational Impact

Positives

Customer focus

Cross-functional

integration Open sharing of

information

Better process

understanding

Negatives

Too much customer

focus

Potentialorganizational conflict

Too much pressure to

attain targets

Longer developmenttimes

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