Target Costing

1
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

2
Target Costing Process

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

3
Target Costing Process

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

4
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

5
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

6
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

7
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

8
MALP

• Strategic Implications of Mgt. Acctg. Systems
• Quality choices can be affected
• Cost is fundamental
• Provides information on timeliness of production

9
Determinants
Strategic Choices
Cost Structure
Environment
-Structural Elements -Work Processes
Management Accounting System
Production Methods
10
Types of Production Methods

• Craft
• Mass Production
• Lean Production (Flexible Mfg. System)

11
Structure Differences

• Mass
• Inflexible single purpose
• High set-up time
• Low labor skill level
• Lean
• Multi-use equipment
• Low set-up time
• Skilled labor force

12
Work Process Differences

• Mass
• Supervisory control
• Precise control over supplier
• Standardized products
• Independent, sequential prod. develop.
• Lean
• Empowered workers
• Cooperative relationship w/suppliers
• Customer focused organization
• Concurrent, integrated design

13
Cost Structure

• Mass
• Driven by volume
• Allocation of fixed costs
• Lean
• Driven by process or activity

14
Mgt. Acctg. System in Lean Production

• Driver focused
• Value chain focused
• Limited need for inventory reporting
• Indirect cost orientation

15
Lean Prod--Attributes

• Technical
• Better decision relevance
• Driver focused
• External orientation
• Cross functional value chain focus
• Better process understanding

16
MALP--Attributes, cont.

• Behavioral
• Team responsibility
• Multiple motivation
• Accountant as team player
• Quality commitment
• Global optimization
• Risk of burnout

17
MALP--Attributes, cont.

• Cultural
• Team responsibility
• Cooperation vs. competition
• Focus on overall common good
• Change in locus of power