Target costing Prepared By Melwin Mathew

target costing.

1. TARGET COSTING

2. 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.

3. 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 (Tanaka) continuous improvement, “cost kaizen”, inevitably lead to fewer opportunities to cut costs (Tanaka) SOLUTION: actual costs -> p redetermined costs

4. STAGES IN TARGET COSTING Identifying the product that satisfies the needs of the potential customers. Reaction of the competitors. Determination of target price. Determination of target operating income per unit. Deriving target cost per unit Application of value engineering

5. Features of Target Costing Process It is an integral part of the design and introduction of new products. A target selling price is determined using various sales forecasting techniques. Establishment of target production volumes. Determine cost reduction targets. A fair degree of judgement. A series of intense activities. A team-based set up to achieve its objectives.

6. OBJECTIVES To lower the costs of new products so that the required profit level can be ensured. It emphasizes understanding the market and competition To motivate all company employees to achieve the target profit

7. Advantages of Target Costing Proactive approach to cost management Orients organization toward customer Breaks down barriers between departments Enhances employee awareness and empowerment Reduces development cycle of a product . Reduces cost of products . It enables the organization to face & stay in the ever growing competitive environment . It aligns cost of features with consumers’ willingness to pay . It reinforces the commitment for INNOVATION . It gives the consumers “MAX. SATISFACTION”. 9- 7

8. Disadvantages of Target Costing Requires many meetings for coordination Development of process can be lengthened . A large amount of cost cutting can result in finger pointing. Sometimes difficult to reach a conclusion.

9. Companies using Target Costing Companies that use target costing : Although it is a relatively new concept, it is being used heavily in most large companies especially automotive and aerospace industry. e.g : General Electric Motorola U.S auto companies G.M Ford and Diamler Chrysler. Japan’s auto companies Toyota, Honda ,Nissan , Mitsubishi Nasa U.S Military Sony.

10. THANK YOU