STRATEGIC COST MANAGEMENT BA122B Spring 2005Slide 51

1
Life Cycle Costing
Product SpecificationTarget PriceTarget
ProfitTarget CostMajor Product and Process
Design ChangesDoes the designmeet target
cost?Estimate LifeCycle CostIs project life
cycle cost acceptable?Put product into
productionMinor Product and Process Design
ChangesProduct Abandonment
TargetCosting On-goingimprovement Abandon
ment
2
Product Cost Life Cycle

• R D
• Design
• Production
• Marketing Distribution
• Customer Service

Upstream(focus for earlysettlement here)
Downstream
3
Shift in Strategic Impact

• Shift focus from manufacturing costing to
• Upstream or downstream focus using the value chain

4
Target Costing

• Customer Orientation
• Sets costs in the commitment phase-concurrent
  engineering
• Supports keiretsu model via the value chain
• Price led costing
• Cross functional product teams
• Focuses on life cycle costing

5
Target Costing Process

• Establishment phase
• Market research
• Competitor analysis
• Niche definition
• Customer requirement definition
• Product feature definition
• Market price determination
• Profit rate

6
Target Costing Process

• Attainment phase
• Cost gap computation
• Design costs out
• Design release and continuous improvement

7
Cost Reduction

• Cost analysis
• Components list
• Functional analysis
• Customer requirement ranking
• QFD Matrix
• Relative functional rankings
• Value engineering
• Identify components for cost reduction
• Generate cost reduction ideas
• Testing and implementation
• Cost estimates required at each design iteration

8
Value-Index Analysis

• Choose features and options based upon customer
  preference
• Value-Index Cust. Preference Feature
  Cost
• VI gt 1increase spending
• VI lt 1decrease spending

9
TC-Strategic Implications

• Quality is improved through the customer focus of
  target costing
• Cost reduction is the heart of target costing
• Time reduction is a natural by-product due to
  concurrent engineering

10
TC-Attribute Implications

• Technical
• Decision relevance improves (quality, cost and
  time issues are integrated)
• Process understanding improves
• Behavioral
• Early finance involvement and teamwork are
  mandated
• Undesirable attributes of longer development,
  burnout, feature creep internal conflict can be
  managed

11
TC-Attribute Implications, cont.

• Cultural
• Organizational culture must be prepared
• Commitment to sustaining values must be
  established
• Customer focus
• Cross-functional cooperation
• Open sharing of information