Target Costing.ppt
- 1. TARGET COSTING Target costing is a business process aimed at the earliest stages of new product and service development. The components of target costing consist of concept development through planning and market analysis; product development using value engineering; and production with continuous improvement goals. Target Costing can be best understood by considering its four components: •Planning and market analysis •Concept Development •Production Design and Value Engineering •Production and continuous improvement
- 2. TARGET COSTING It is a cost planning method used during the RD&E cycle that focuses on reducing costs for products that require discrete manufacturing processes and reasonably short product life cycle. Features: 1.The target selling price is the starting point. 2.Marketing factors and customer research provide the basis for determining selling price (Not cost). 3.Emphasizes a team approach to achieving the target cost. 4.Most suited to high sales volume products
- 3. TARGET COSTING PROCESS Stage 1: Determine the target price which customers will be prepared to pay for the product through Market Analysis. Stage 2: Deduct a target profit margin from the target price to determine the target cost. Target Cost = Target Price – Profit Margin Stage 3: Estimate the actual cost of the product. Stage 4: If estimated actual cost > target cost investigate ways of driving down actual cost to the target cost. .
- 4. • Under traditional costing, the profit margin is the result of the difference between the expected selling price and the estimated production cost. Pt = St – Ct • The target cost is the difference between the target selling price and the target profit margin. Ctc = Stc – Ptc COMPARING TRADITIONAL COST REDUCTION TO TARGET COSTING
- 5. COMPARING TRADITIONAL COST REDUCTION TO TARGET COSTING Traditional Target Costing Costing Market Research to Determine Customer Needs and Price Points Customer Requirements Product Specifications
- 6. Target Selling Price Target Product Volume Design Target Profit Engineering Supplier Pricing COMPARING TRADITIONAL COST REDUCTION TO TARGET COSTING Traditional Target Costing Costing
- 7. CONCERNS ABOUT TARGET COSTING What are some potential problems in implementing target costing? 1 Conflict can arise between parties involved in the process. 2 Employees may experience burnout due to pressure. 3 Development time may increase.