Transcript Target Costing

Presented By:
Woodrow Arrington (Future CPSM)
Kohl’s – Merchandise Analyst
Contact me at [email protected] for more information
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Target Costing Definition
Brainstorming Exercise
Goal of Target Costing
Target Costing Nuts & Bolts
Target Costing Overview
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Part 1- Analysis
Part 2 – Design
Part 3 – Implement
Real World Application
Now It’s Your Turn
Review & Summary
Reading List & Further Research
An approach used to identify the
anticipated selling price for product as well
as the allowable price for each component
• Why would a company consider target costing?
• What advantages can target costing provide?
• Where can target costing be used?
The goal of Target costing is:
o Design a product following a set cost structure in
o Cut unnecessary costs
o Improve product design
Target costing is based off this simple equation:
Determine
anticipated
selling price
Identify
desired
profit
margin
Calculate
allowable
price for
each unit
component
Component
#1
Component
#2
Component
#3
Perform Market Research & Identify Customer Needs
Determine Target Price & Desired Profit Margin
Develop Cost Projections for Each Component
Explore Different Product Design Alternatives
Perform Value Engineering / Value Analysis
Production
Continuous Cost Reduction
Approved
final product
design
Perform Market Research & Identify Customer Needs
Determine Target Price & Desired Profit Margin
Part 1 - Analysis
o Begin by researching the target market and consumer
o Determine a target price that consumers expect
o Determine how much profit margin you expect
Example
o Arrington Enterprises sells widgets
o Market prices for widgets are $15; Arrington wants to sell widgets at $13
o Arrington wants to earn a 10% margin on all widgets sold
o With an target sell price of $13, a 10% margin, Arrington can spend $11.70 to create a
widget
Develop Cost Projections for Each Component
Explore Different Product Design Alternatives
Perform Value Engineering / Value Analysis
Part 2 - Design
o Once an overall cost allowance is calculated, determine cost projections for each
component within the product
o Design the component within the allocated cost budget
o Value Engineering / Value Analysis (VE/VA) for each component asks whether the part can
be substituted, simplified, or eliminated
o Repeat the cycle as necessary
Example
o Arrington can spend $11.70 to create a widget
o Allocated cost budgets for each part is as follows: Part A= $5, Part B= $4.75, Part C= $1.95
o Each part is designed according to its allocated cost budget
Perform Value Engineering / Value Analysis
Production
Approved
final product
design
Continuous Cost Reduction
Part 3 - Implement
o Once a final product is design that meets the allocated cost budget production begins
o Continue to re-evaluate the product design using VA/VE to continue cost reductions
Example
o Arrington succeeds in designing a widget that costs $11.70 and sells it at $13, = 10% margin
o Arrington continues to re-evaluate the widget design for more cost reductions
o Through more Target Costing and VA/VE, Arrington further reduces costs to $11.35
In Business | Target Costing Approach--An Iterative Process:
Target costing Technique is widely used in Japan. In the automobile
industry, the target cost for a new model is decomposed into target costs
for each of the elements of the car--down to a target cost for each of the
individual parts. The designers draft a trial blueprint, and a check is
made to see if the estimated cost of the car is within reasonable distance
of the target cost. If not, design changes are made, and a new trial
blueprint is drawn up. This process continues until there is sufficient
confidence in the design to make a prototype car according to the trial
blueprint. If there is still a gap between the target cost and estimated
cost, the design of the car will be further modified.
After repeating this process a number of times, the final blueprint is
drawn up and turned over to the production department. In the first
several months of production, the target costs will ordinarily not be
achieved due to problems in getting a new model into production.
However after that initial period, target costs are compared to actual
costs and discrepancies between the two are investigated with the aim of
eliminating the discrepancies and achieving target costs.
Source: Yasuhiro Monden and Kazuki Hamada, "Target Costing-Kaizen Costing in Japanese
Automobile Companies," Journal of Management Accounting Research 3, pp. 16-34.
Toyota wants to compete with GM’s Chevy Cobalt by reducing the price of its Corolla by
7%. In order to do so costs need to be reduced while still protecting Toyota’s mandatory
profit margin of 5%. Three components of Toyota’s Corolla have been identified as
opportunities for reducing significant costs, the chassis, the electronics, and the engine,
other parts are also expected to reduce similar costs. What should the new cost
structure of these parts look like to give the new Toyota Corolla a price advantage over
the Chevy Cobalt?
Info (Assume Cobalt is comparable to Corolla):
GM’s Chevy Cobalt currently retails at $15,000
Toyota Corolla retails at $15,500
Toyota Corolla parts:
Chassis = $3,600
Electronics = $1700
Engine = $4000
Other = $5425
GM’s Chevy Cobalt currently retails at $15,000
Toyota Corolla retails at $15,500
Target market price of new Toyota Corolla = $14,415 ($15,500 * .93) 7% Price reduction
Allowable cost budget for entire car = $13,694 ($14,415 * .95) 5% Profit Margin
New cost budgets for Toyota Corolla parts:
Chassis = $3348 ($3,600 * .93) 7% Price reduction
Electronics = $1581 ($1700 * .93) 7% Price reduction
Engine = $3720 ($4000 * .93) 7% Price reduction
Other = $5045 ($5425 * .93) 7% Price reduction
By reducing the costs of each component by about 7% Toyota can still maintain its 5%
profit margin and reduce the price of its Corolla from $15,500 to $14,415.
Target costing is based off this simple equation:
Determine
anticipated
selling price
Identify
desired
profit
margin
Calculate
allowable
price for
each unit
component
Component
#1
Component
#2
Component
#3
Best Practices in Target Costing : http://www.imanet.org/pdf/1236.pdf
Target Costing Approach to Pricing:
http://www.accountingformanagement.com/target_costing_pricing_pro
ducts_and_services.htm
Managerial Implications of Target Costing:
http://www.allbusiness.com/accounting-reporting/methods-standardscost-accounting/846519-1.html
Accounting for Management, “Target Costing Approach to Pricing”, Apr 8, 2010,
http://www.accountingformanagement.com/target_costing_pricing_products_and_services.htm
All Business A D&B Company, “Managerial implications of target costing” Apr 6, 2010,
http://www.allbusiness.com/accounting-reporting/methods-standards-cost-accounting/8465191.html
Management Accounting Quarterly, “Best Practices in Target Costing”, Apr 7, 2010,
http://www.imanet.org/pdf/1236.pdf
ISM, “Target Costing Model”, Apr 8, 2010, http://images.google.com/imgres?imgurl=http://www.npdsolutions.com/image33.gif&imgrefurl=http://www.npdsolutions.com/target.html&usg=__iiMpHaeUC8MEhTdCrdQLiSX0A8=&h=275&w=361&sz=5&hl=en&start=1&itbs=1&tbnid=8DLY8XciaXc3lM:&tbnh=92&tbnw=121&p
rev=/images%3Fq%3Dtarget%2Bcosting%26hl%3Den%26safe%3Dactive%26sa%3DN%26gbv%3D2%26nd
sp%3D20%26tbs%3Disch:1
Yasuhiro Monden and Kazuki Hamada, "Target Costing-Kaizen Costing in Japanese Automobile
Companies," Journal of Management Accounting Research 3, pp. 16-34.