Transcript TARGET COSTING... What Is It?

TARGET COSTING**
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** These slides have been developed jointly with CAM-I and include material covered in the book
Target Costing: The Next Frontier In Strategic Cost Management
By:
Shahid Ansari
Jan Bell
and
The CAM-I Target Cost Core Group
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING ...
A Case for Action
 Global
competition with mobile capital
 Technology leadership no longer
provides lasting competitive edge
 Pressure for lower prices
 Shorter product life cycles
 Demand for custom products
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING ...
The new competitive
environment
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Global competitiveness requires balancing
quality, cost, and time
Time
 Target costing focuses on all three
dimensions of the strategic triangle
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...
State of the Art in the U.S.
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US Companies
67% use cost plus pricing
Cost estimates need great
improvements
Estimate of sales volume
provided to suppliers are
overstated between 11-25%
No tight monitoring of profits,
costs, capital investment,
quality, development budget,
and performance.
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Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Japanese
Companies
100% used price minus profit
Achieve 80% accuracy of cost
estimates at product concept
stage
Estimate of sales volume
provided to suppliers are within
+/-5%
Tight monitoring of profits,
costs, capital investment,
quality, development budget,
and performance.
TARGET COSTING...
What Is It?
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A target cost is the allowable amount of cost that can be
incurred on a product and still earn the required profit
from that product
A strategic profit and cost management process
 Price-led
 Customer-focused
 Design-centered
 Cross-functional
 Life cycle oriented
 Value Chain-based
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...
Managing committed costs
100
Committed Costs
Costs
80
60
40
Incurred Costs
20
0
PRODUCT
CONCEPT
DESIGN AND
DEVELOPMENT
PRODUCT
PRODUCTION
DISTRIBUTION
SERVICE
DISPOSITION
DEVELOPMENT CYCLE
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...
A Different Profit Planning
Approach
 Cost
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 Target
Plus
Market considerations not part of
cost planning.
Costs determine price.
Waste and inefficiency is focus of
cost reduction efforts.
Cost reduction is not customer
driven.
Cost accountants manage costs.
Suppliers involved after product
designed.
Minimizes initial price paid by
customer.
Little or no involvement of value
chain in cost planning.
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Copyright, Ansari, Bell, Klammer and Lawrence, Management

Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Costing
Competitive market considerations
drive cost planning.
Price determines costs.
Cost reduction is achieved by
simultaneous product/process
design.
Customer input guides cost
reduction.
Cross-functional teams manage
costs.
Suppliers involved in concept and
design of product.
Minimizes cost of ownership to
customer.
Involves the value chain in cost
planning.
TARGET COSTING...
In the Product Development
Process
VOICE OF THE CUSTOMER
Market
Research
ESTABLISH TARGET COSTS
ATTAIN TARGET COSTS
Competitive
Strategy
Product Strategy
and Profit Plans
Product
Concept &
Feasibility
Product
Design &
Development
Competitive
Intelligence
EXTENDED ENTERPRISE PARTICIPATION
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Production
and
Logistics
TARGET COSTING...
Setting Target Costs
Market
Market
Research
Research
MARKET
PRICE
Define Product/
Customer Niche
Understand
Customer
Requirements
Competitor
Competitive
Analysis
Analysis
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Define
Product
Features
TARGET
COST
REQUIRED
PROFIT
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TARGET COSTING...
Voice of the Customer
 Develop
a market-focused mindset
– Open-minded, inquisitive, take nothing for granted,
share what you learn
 Solicit
customer information
– Panels, focus groups, interviews, surveys
 Analyze
customer feedback
– Profiles, charts, maps, tables
 Understand
completely what the customer
truly values
– Features and cost determine value
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...
Listening to the
customer?
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...
Price and Profit Margin
Pricing is dynamic
Multi-year
– Collectively consider
Product
competitor prices, market
and
Profit Plan
share goals, and customer’s
acceptable price.
Required
Price - Profit
 Compute profit over the life of a
Profit
product
– Profit targets may change
ALLOWABLE
each year
TARGET COST
 Target margins must consider
firm’s required financial rate of
Copyright, Ansari, Bell, Klammer and Lawrence, Management
return
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
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Market
Price
TARGET COSTING...
Who Participates
 Major
cross-functional teams
–Business Planning Team
–Product Team
–Design Team
–Product Manufacturing Team
 Team and functional coordination
 Supporting infrastructure
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...
Linear Product Design!
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...
Involving the Value Chain
TIER THREE
SUPPLIERS
TIER TWO
SUPPLIERS
TIER ONE
SUPPLIERS
SERVICE &
SUPPORT
PRODUCER
SUPPLIERS
DISTRIBUTORS
CUSTOMERS
RECYCLERS/
DISPOSERS
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OPTIMIZING THE SUPPLY CHAIN
Characterize the Supply Chain
 Nature and number of suppliers
 Distance from the producer
Develop Long Term Relationships
Involve Suppliers in Design
Maintain Margins
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
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EXPECTED CONTRIBUTIONS
Better Focus on Customer
Requirements
Provide Input and Ideas Early in the
Concept Formation Stage
Eliminate Non-Value Added
Activities
Pursue Standardization
TARGET COSTING...
Achieving Target Costs
COMPUTE COST GAP
Initial
Cost
Estimate
s
Compare
To
Target
Cost
DESIGN COSTS OUT
Design
Products/
Processe
s
Perform
Value
Engineerin
g
Perform
Cost
Analysis
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
PRODUCE
Estimate
Achievabl
e
Cost
ACTUAL
COST
Release
Design to
Productio
n
Undertake
Continuous
Improvemen
t
TARGET COSTING...
Information
Requirements
COMPETITIVE INTELLIGENCE
MARKETING DATA
COST DATA
TARGET COST
INFORMATION
PROCUREMENT DATA
Information not routinely collected.
Existing information not routinely available.
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
ENGINEERING DATA
TARGET COSTING...
Typical Information Gaps
PRODUCT
STRATEGY
CONCEPT AND
FEASIBILITY
DESIGN AND
DEVELOPMENT
PRODUCTION
& LOGISTICS
Product Development Cycle (When tools are used)
Customer &
Marketing
Competitive Prices
and Features
Product
Life-cycle
Engineering
Systems
Feature/Price Data
Attribute/Price Data
Feature/Cost Data
Cost systems
Competitor Cost
Technology Life
Cycle
Procurement
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Attribute/Cost Data
Function Cost Data
Component
Interaction
VE Case Studies
Supplier Cost
Data
Improvement Ideas Database
Type of Information needed
Competitive
Intelligence
TARGET COSTING...
Supporting Tools
PRODUCT
STRATEGY
CONCEPT AND
FEASIBILITY
DESIGN AND
DEVELOPMENT
PRODUCTION
& LOGISTICS
Product Development Cycle (When tools are used)
Functional Expertise for Tools
Planning
Marketing
Multiyear Product Plan
Multiyear Product Plan
Benchmarking
QFD
Cost Tables
Feature Costing
QFD
Function Cost
Component Cost
Process Costing
Engineering
Value Engineering
DTC
QFD
Value Engineering
DFMA, DTC
QFD
Procurement
Supplier Based
Value Engineering
Supplier Based
Value Engineering
Costing
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Value Analysis
TARGET COSTING...
Extending The Domain
Many service industries (e.g.
telecommunications) are design driven and
can use target costing.
 The design philosophy of target costing can
be broadly applied to many nonmanufacturing situations.
 The customer value approach of target
costing provides a useful strategic umbrella
for ABM and BPR leading to an integrated
cost management approach.
 Target Costing can be used to address legacy
Copyright,
Ansari, Bell,
Klammer and Lawrence,
Management redesign.
costs
through
creative
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
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TARGET COSTING...
Does It Work?
CHRYSLER’S RESULTS -- 1994
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Meets customer requirements for safety and
driveability
Neon named “Auto of the Year” in 1994
Short development time (concept to market 31
months)
Below projected development and investment
budget
Neon one of few small cars that earns a
positive return
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...
Does It Work?
CHRYSLER’S RESULTS -- 1995
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Chrysler's share price $10 in 1990 to $54 in 1995
Since 1990, revenue increase 70%
Market share increase by 2.1%
Profits and cash flows increase 400% since 1990
Profit margin ratio up from 0.33% to 7.1% in 1995
Chrysler’s Truck Line (including Jeeps and Minivans)
number one among US carmakers in “Power Survey.”
Industry benchmark study finds Chrysler the low cost
producer in North America for second straight year.
Standard & Poors and Duff & Phelps raised credit
ratings - first time since 1974 to “A” level.
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...
Does It Work?
CHRYSLER’S RESULTS -- 1996
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Industry Sales Above Trend
Stock Levels -- Well Positioned for Launch of 1997
Models
Relatively Stable Incentives
Labor Contract
New Products
 Full Wrangler Production
 All New Dakota -- Very Well Received By
Automotive Press
 Jeep Cherokee Update
Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...
Critical Success Factors
POLITICAL
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Accommodate legitimate interests
Obtain “buy-in” from major groups
Avoid turf battles
TECHNICAL/
STRUCTURAL
BEHAVIORAL
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Early functional involvement
Engineering owns costs
Marketing evaluates trades
Targets are commitments
Cross-functional cooperation
Accounting as “business advisor”
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LEADERSHIP
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New data
New tools
Cross-functional teams
New business processes
Revised career paths
Partnerships in value chain
CULTURAL
 Open information sharing
Customer
focus
 Cross-functional teamwork
 Bell,
Trust
Copyright, Ansari,
Klammer and Lawrence, Management

Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.