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21 Errores de Lectura Que Nunca Debes Cometer para Leer Rapido VSL
21 Errores de Lectura Que Nunca Debes Cometer para Leer Rapido VSL
INTEGRATING TARGET
COSTING AND ABC
Gary Cokins
occurs at the very beginning of a ABC has been popular for link-
T arget costing is a technique
that predetermines an ideal
product cost to maximize profits
product’s life cycle. Organizations
cannot wait until a product has
ing how products, channels, and
customers affect the organization in
across that product’s life cycle. been launched and enters the pro- terms of employee time and
ABC is typically applied to prod- duction phase of its life cycle to expenses. It is typically computed
ucts already in production; some reveal the cost impact of earlier for ongoing operations where work
of the ABC system data, however, design decisions. A nickname for is recurring in varying amounts.
is useful for target costing. target costing is “profit by design.” But ABC data has substantial input
A new product’s product design It is only after the new product is into target costing when equip-
phase governs the majority of its in production that other cost man- ment and machines are thought of
life-long costs during the mature agement techniques, like continu- as doing activities—just like people.
phase of its life-cycle cost manage- ous improvement, are applicable. By using time-equivalents based on
ment. The mature phase refers to the ways a product’s unique features
the period in which the product is consume a machine, ABC provides
in the marketplace performing at cost rate tables. These tables were
EXECUTIVE SUMMARY
its peak potential. Assurances are the foundation of target costing, a
made using various techniques ❚ As product life cycles shorten and Japanese innovation.
that the eventual product costs are consumer demands for customization Other techniques that support
economical after the product is escalate, predetermining costs and profit target costing, such as value engi-
released into production. An margins across a product’s life cycle neering and quality function
increasingly popular technique to becomes increasingly important. deployment (QFD), can also be
achieve a profitable outcome is linked to ABC data. This article,
called target costing.Target costing ❚ Ideal selling prices and expected
profit margins determine a product’s however, will focus mainly on tar-
allowable cost. Often, supplier quota- get costing and ABC.
B C
Journal of Cost Management advisory tions exceed allowable cost, and the bur-
board member GARY COKINS is direc- den is placed on the supplier to close NEW VERSUS EXISTING
tor of industry relations for ABC Tech- PRODUCTS
that gap.
nologies, Inc., the leading provider of activ- The Internet has shifted the bal-
ity-based information software. He is an
internationally recognized expert, speaker, ❚ ABC data helps suppliers and ance of power from suppliers to
and author in advanced cost management product designers translate product fea- consumers, and firms that do not
and performance improvement systems. tures into future product costs. understand how to aggressively
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DETERMINING A
MAXIMUM ALLOWABLE
PRODUCT COST
The allowable product cost that
target costing will use to influence
the designer’s behavior consists of
two factors: the selling price and an
acceptable economic profit.3 The
first factor primarily considers cus-
tomers and the second considers
the financial returns expected by
shareholders and investors. Exhibit
3 illustrates the elements and
sequence of thinking that yields an
allowable product cost.
predicament: they can only slightly times referred to as “same-as
DETERMINING THE TARGET
decrease costs, by introducing some except-for.” SELLING PRICE
level of efficiency; but they cannot • In some circles, applying ABC
Setting a product’s price is the
substantially reduce costs outside for costing the components
critical initial step that drives the
the constraints of the predeter- that comprise products has
target costing process. The selling
mined product (and associated been called feature-based cost-
pr ice takes into consideration
process) designs.The next place that ing.The product’s design fea-
three main players: customers,
production personnel look for tures govern the amount of
competitors, and a company’s
lower costs is to extract a lower cost usage.The future unit cost
senior management. Senior man-
purchase price from their suppliers. of a new printed circuit board,
agement’s important contribu-
for example, might be esti-
Price pressure steamrolls back to tion is to define and adjust the
mated based on the number of
the lowest tiers of suppliers. strategies.
holes punched, number of
In Exhibit 1, the ABC data is
board levels, and so forth.The Customers
applicable without question dur- unit cost for each hole Understanding a customer’s per-
ing the mature phase of the prod- punched and for each board ceived value of a product or service
uct’s life cycle, where the work is placement will likely have been as well as their attitude for purchas-
recurring. Some of the ABC data, derived in the historical ABC ing things from you is key. Cus-
however, is also useful during the system. In effect, the time- tomers are usually unwilling to pay
design and development phases dimension activity driver has a higher price than in the past
(see Sidebar). been converted into an equiva- unless they perceive a change in the
Some examples follow: lent related to the product. new product’s function. In short,
This is sometimes referred to the objective is to design a product
• Cost rates that are effectively as cost rate tables. to sell at its target price and achieve
calibrated in historical ABC
the planned sales volume.
reporting can be used to In these ways, the ABC data, which
extrapolate costs in the design is so powerful in the recurring Competitors
of new products.This is the phase of a product’s life cycle, can Customers are shoppers, and as
feed-forward link from ABC to also be leveraged in the up-front earlier described, the Internet is
new products, and is some- product design phase. In short, tar- providing them with capabilities
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The rule for estimating product-related production costs is to minimize the number of indirect cost
centers and categories to be included for costing, while at the same time carefully considering the plan-
ning horizon. In the end, the inclusion and exclusion of various expenses as costs is judgmental. Ideally,
the complexity of the ABC model should be minimized such that the activity expenses share the same
cost driver. Feature-based costing does not involve support work as much as it involves the intimate
relationship between the product and the machine that produces it. Feature-based costing, however,
draws on the same aforementioned principle about event-driven assignment of costs.This relationship is
now addressed.
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Now, however, the activity-driver rate is based on a component feature, not on time.The projected cost
of the proposed new board BBB can be computed as $185.00, using the feature-based cost rates and the
quantity of the feature driver:
Hole-punching = $25.00 (20 Holes x $1.25 per Hole)
Board-passes = $160.00 (4 Passes x $40.00 per Pass)
and automated services to more In a new twist, companies are as the middle box required to
effectively shop and compare. The increasingly adding services to determine the allowable cost. The
selling prices and perceived value their products or base-service idea here is to set profit margins to
of competitor alternatives and lines to differentiate themselves satisfy the profit expectations of
even functional substitutes (e.g., from competitors. As marketing both the company and its investors
plastic instead of glass) must, there- approaches become more refined, or owners.
ABC becomes an essential mea- Similar to the complexities
fore, be considered.
surement tool to plan for and involved in setting prices, no easy
Strategic Objectives understand the cost and profit ways exist to translate the increas-
margin impact of the suppliers’ ingly changing measures of share-
An individual product or service
value-added (or unbundled) ser- holder return expectations into
line should not be sold in isolation
vice offerings. For our purposes, product profit margins. Advanced
of other strategic objectives that a companies have moved beyond
determining the target costing-
company is pursuing. The com- the financial metric of net operat-
derived maximum allowable cost
pany may be attempting to gain ing profits after taxes to free cash
and setting the selling price is one
market share, for example, in flow. They use indicators that also
of the anchors from which we cal-
anticipation of a knockout future culate backward. include the cost of capital as a
generation product. As another resource expense. There are two
example, if the company desires to DETERMINING THE TARGET
approaches to stipulate the desired
project a high image of its tech- PROFIT MARGIN investment return:
nologies and employees with its The other key determinant to set- 1. Baseline experiences.
products and services, higher ting the target price is the target 2. Capital budgeting using life-
prices may strengthen that image. profit margin. Exhibit 3 shows this cycle analysis.4
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EXHIBIT 5
Target Costing Pressures on New Products
product or service line must pro- UNBRIDLED DESIGNERS 3 that determined the allowable
duce or deliver if it is to achieve AND SUPPLIERS product cost.
the target profit margin when sold Left to their own devices, the In a loosely managed product or
product and service-line design- service-line development process,
at the target price. The maximum
ers, often influenced by the mar- the product and service-line design-
allowable cost is a critical measure, keting people, would likely come ers take their cue from the market-
because it serves as a beacon and up with a product that is sure to ing research people. The marketing
loudspeaker to employees and even be above the maximum allowable people presumably combine two
to the company’s suppliers (as we cost. A similar situation applies to areas of research:
will see next) involved in the target the process designers, who must
comply with the specifications 1. Ascertaining the wants of their
costing process of the amount of customers and prospects.
handed down by the designers.
cost reduction to be achieved. As The process people cannot afford 2. The company’s strategic goals
an oversimplification, target costing to make the product with their for specific additional types of
is as much a technique for profit existing assets and capabilities. customer and market segments
management as it is for cost man- This is why target costing has desired in the future.
evolved. It is the harness to pre-
agement.
vent runaway cost build up. Like artists, the designers and
Let’s now look at what deter- Exhibit 4 illustrates the cost build- process engineers brainstorm to
mines, and is included in, the up, and is combined with the tar- create innovative ideas. Without
expected cost. get costing illustration in Exhibit restrictions, the enthusiasm to
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freely design cascades down to the ized—whether they are product, The Internet greatly facilitates real-
component suppliers who are part component, or process-related— time, synchronous collaborative
of the company’s extended supply the gap narrows to zero. Then, the work efforts involving teams of
chain.A company does not want to target cost is successfully, and people widely dispersed across net-
stifle this sometimes out-of-the- finally, reached. worked organizations. This broad-
box thinking, but it must ensure Going forward, the transmission ened scope is simply an evolution-
that the designers’ energy stays of pressure from the buyer to the ary step in the value chain’s ability
within the cost parameters deter- supplier will be an exciting area.Tra-
to deliver product features that have
mined by the requirements of the ditionally, the relationship between
already been envisioned to con-
company’s profit-minded investors. buyer and supplier has been adver-
sumers. But it greatly slashes the
Exhibit 5 combines Exhibits 4 sarial, where the buyer, if in a posi-
and 3 so that the maximum allow- tion of power, demands price con- time-to-market for those who can
able cost comes face-to-face with cessions, which can lead to financial do it well. Advances in supplier
the expected cost. An unbridled trouble for the supplier and, hence, integration and communications as
design process will lead to expected purchasing woes for the buyer. well as each enterprise’s business
costs that exceed the targeted costs. Today, a more preferred choice is management software (e.g., ERP)
This outcome is not to be unex- collaboration—the key term in turns PDM into CPDM.
pected. After all, the allowable cost is value chain management. Emerging ABC provides key cost data to
derived from external factors (i.e., software and information technol- assure the ‘target’ in target costing is
customers, investors, and competi- ogy tools—many of them Internet attained. Traditional cost allocation
tors), and is computed independent based—that facilitate rapid and schemes have been excessively sim-
of the internal design and produc- accurate exchanges about product plistic leading to flawed answers. As
tion capabilities of the company. designs among the participants in the margin for error gets slimmer,
The if-then diamond-shaped the value chain. This is sometimes ABC becomes a crucial methodol-
symbol in the flow chart in Exhibit referred to as collaborative product ogy for cost assignment. ■
5 is where the cost reduction goal definition management (CPDM).
setting process kicks in.The dashed CPDM was preceded by product Notes
lines are the transmitted forces that data management (PDM). PDM 1. Robin Cooper and Regine Slagmulder, Tar-
cascade downward toward, and solved problems of computer-aided get Costing and Value Engineering (Portland,
into, the component providers (i.e., design file management.As technol- OR: Productivity Press, 1997), p. 49.
internal or external suppliers), in ogy evolved, the scope expanded 2. Cooper and Slagmulder, 59.
3. Cooper and Slagmulder, 104.
the form of revised specifications beyond design engineering depart- 4. Cooper and Slagmulder, 100-101.
and other information exchanges.6 ments to include change control 5. Cooper and Slagmulder, 122.
Ideally, as cost reductions are real- and configuration management. 6. Cooper and Slagmulder, 140
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