Target Costing

One example - Toyota

 surpassed GM in 2005 as the largest auto

manufacturer in the world.
 It has been reported that Toyota's approach to
entering the U.S. market was first to be steadfast
in achieving a certain net profit margin.
 they determined what price they had to offer in
order to get Americans to buy their small import.
 since the difference was the cost of the car they
could offer, Toyota designed the solution
accordingly. This method is known as “target
costing.”
 Target Costing

Target Costing is defined as a cost

management tool for reducing the overall
cost of a product over its product life cycle.
 Target costing is a cost modeling technique
that determines what price consumers are
willing to pay for a product, and then works
backwards to determine profit margins and
allowable costs.
target cost
 a calculated number that the operating
costs cannot exceed once the product
design is released.
 applied at the beginning of a product’s life
cycle during the concept and design
phase.
 This technique is in contrast to the
traditional cost-plus markup method that
is commonly used by manufacturers
 It is easier and much less expensive to
design costs out of a product rather than
figure out how to eliminate them after the
product is in production
 Target Costing
Our policy is to reduce the price, extend the
operations and improve the article. You will notice
that the reduction of price comes first…. We first
reduce the price to the point where we believe more
sales will result…. The new price forces the cost
down…the point is the fact that although one may
calculate what a cost is, and of course all of our costs
are carefully calculated, no one knows what a cost
ought to be. One of the ways of discovering is to
name a price so low as to force everybody in the place
to the highest point of efficiency. The low price makes
everybody dig for profits.

-Henry Ford
STEPS
 what the market is willing to pay for a
product. Three main players are taken
into consideration: customers,
competitors, and a company’s senior
management.
 competitors alternative and substitute
products.
 customer’s perceived value of a product as
well as their attitude for purchasing
products.
 Senior management must define and
adjust strategies to meet the company’s
objectives.
CUSTOMER VIEWS
 company was considered 25 % costlier by
customers and not meeting expectations.
 A STRUCTURED TARGET COSTING EXRECISE.
 extensive survey was conducted in the target
market segment through the market teams and
the following characteristics or features were
tabulated as priority of customers:
 Mixability with petrol
Gloss in the paint
Hiding in one coat
Flow through gun nozzle
Drying Time.
Smell
Colour range
 A typical enamel paint consists of materials
 such as pigments,
resins, solvents and other additives
 A functional mapping and value engineering
was carried out of the current over priced
product and gaps identified for value
improvement and cost reduction. For
example the current drying time was 16 hours and the target
established by the customers was 8 hours. redesign in one of
the components.
STEP 3
 Calculate the allowable product cost
 If the maximum allowable product cost is
exceeded there will be undesirable
outcomes.
 First, the company will increase the price of
the product in order to maintain the desired
profit margin. This will decrease sales volume
and the optimal sales-price combination will
not be achieved.
 Second, investors will be dissatisfied
The firm has two options for reducing
costs to a target cost level:

 Integrating new manufacturing technology

 Redesigning the product or service

STEP 2
 Determine target profit margin
 – Profit margins must be set to satisfy the
expectations of both the company and its
investors.
 Two approaches - baseline experiences and
capital budgeting using lifecycle analysis.
Steps required for Target Costing
 Determine the market price.
 Determine the desired profit.
 Calculate the target cost at market price less
desired profit.
(Target Cost=Competitive Price-Desired Profit)

 Use value engineering to identify ways to reduce

product cost
 Use kaizen costing and operational control to
further reduce cost.
 Value Engineering
To reduce product cost by analyzing the
trade-offs between
(1) different types and levels of product
functionality and
(2) total product cost
 Value Engineering
 Functional analysis

 Design Analysis

 Cost tables

 Group Technology
 Functional Analysis

A common type of value engineering in

which the performance and cost of each
major function or feature of the product is
examined.
 Design Analysis

The form in which the design team

prepares several possible designs of the
product, each having similar features that
have different levels of performance and
different cost.
 Cost Tables

Computer-based databases that include

comprehensive information about the
firm’s cost drivers.
 Group Technology

A method of identifying similarities in the

parts of products a firm manufactures, so
the same part can be used in two or more
products, thereby reducing costs.
ONE MORE EXAMPLE
 The Indian government has launched a
prototype of a laptop touch screen like the
iPad, with the price of just $ 35 (£ 23,
which hopes to make next year. Tablets
are intended for students in which this
tablet supports web browsing, video
conferencing and word processing,
developers said
 Nicholas Negroponte – MIT Media Lab –
announced plans to develop a tablet
computer at a price of $ 99 through the
cooperation of his nonprofit, One Laptop
per Child
Thanks………