2. Definition
Target Costing (TC) is defined as a cost management tool for reducing the
overall cost of product over its entire life cycle with the help of the
production, engineering, R&D…..
Intent of target costing
Reduction in cost
Planning & designing high quality products
Meeting customers needs
Using value engineering to target cost
Attain target cost using standard cost
TC which can enable attain desirable market share
3. Nature of Target Costing
Design
Type of Product
Cost
Technical Specification
Technical Requirements
Customers Needs
Market
Resource Consumption (Acq Price) Price
4. Target Costing
Price led Cross-functional
costing teams
Key
Life-cycle principles Value-chain
costs of target orientation
costing
Focus on Focus on
process product
design Focus design
on the
customer
5. Target costing-Methods
1. Subtraction Method
Based on competitors’ price, where the target cost is worked backwards from
the market price. The target result may represent a very rigorous target and may
be difficult to achieve.
2. Addition Method
Based on the existing technology and past cost data of the company. It is
achievable but ignores Market Conditions.
3 Integrated Method
Integration of Subtraction & Addition Methods
6. Steps in Target Costing-Summary
Value added
Product By each
Customer
Performance Feature &
Needs Features
Component
Choose a product Design
Choose With assured target profit
Choose Cost target for each
Manufacturing
Suppliers assuring component
Design assuring
Target cost
target costs
Monitor
Conduct VE to Product performance
Cost Review Reduce Target Costs Cost & Profit
Target Price
7. Achieving the Target Cost- Ex. Pump
EXHIBIT 1
CUSTOMER REQUIREMENT RANKINGS
Less Ranking More Raw % of Total Competitive
Customer Requirement Important Important Score Raw Score Comparison
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
8. Achieving the Target Cost- Ex. Pump
EXHIBIT 2
COST GAP BREAKDOWN BY LIFE CYCLE AND VALUE CHAIN
Value Chain
Life Cycle Internal Costs External Costs Total Costs
Target 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
9. Achieving the Target Cost- Ex. Pump
EXHIBIT 3
COMPONENT 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%
11. Achieving the Target Cost- Ex. Pump
EXHIBIT 5
COMPONENT CONTRIBUTION TO CUSTOMER REQUIREMENTS
Components
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%
Contribution weight assigned to the component (Correlation) X Importance to the
customer (Raw Score from Exhibit 1)
12. Achieving the Target Cost- Ex. Pump
EXHIBIT 6
CALCULATION OF VALUE INDICES FOR COMPONENTS
Percent of Contribution
Component Total Cost Percentage Value Action
(Exhibit 3) (Exhibit 5) Index Implied
Motor 40% 31.64% 1.26 Reduce cost
Transmission 20% 13.88% 1.44 Reduce cost
Speed control 15% 8.88% 1.69 Reduce cost
Body 10% 16.65% 0.60 Improve
Blade 5% 21.83% 0.23 Improve
blade guard 10% 7.03% 1.42 Reduce cost
13. Make the Decision
Begin
Value engineering
Repeat Achieve
Yes No Close No
value target
enough?
engr.? cost?
Yes Yes
No
Abort
project
Release design
for production
