Target Cost

Strategic Cost Management , Target Costing
CONTENTS
• Introduction
• life cycle Cost Management ( LCCM)
• JUST-In-Time SYSTEMS (lean manufacturing systems)
• Benchmarking
• Target Costing
• 1- The Origin Of Target Costing
• 2- The Definitions Of Target Costing
• 3- stages of Target Costing
• 4-Traditional U.S. Cost Reduction Vs. Japanese Target Costing
• 5- Sub-Techniques of the Target cost
• 6- Kaizen Costing
• 7- Concerns about Target Costing
• 8- Advantages
1- Introduction
why strategic cost management ?
1-competitive advantage , it aims to provide a competitive advantage by creating

better or equivalent customer satisfaction at a lower cost than that offered by
competitors.
2-cost reduction, it is oriented approach that focuses on cost reduction and

continuous improvement through changes in the ways that activities and processes
are performed.
hint : the essential considerations of the strategic cost management
cost management seeks to reduce costs, it should not be at the expense of customer
satisfaction and enhancing customer value , so it may be increased by either reducing
the cost without sacrificing product/service functionality , or by increasing
functionality without increasing cost.
1- Introduction
TECHNIQUES RELATED TO STRATEGY COST MANAGEMENT

WERE COMPRISED INTO THIS PRACTICE TO DETERMINE,
ANALYZE, AND MANAGE COSTS IN A STRATEGIC MANNER
,THESE TECHNIQUES ARE:
* ACTIVITY-BASED COSTING,
* ATTRIBUTE COSTING,
* LIFE CYCLE COSTING,
* QUALITY COSTING,
* TARGET COSTING,
* KAIZEN COSTING,
* JUST-IN-TIME SYSTEMS ,
* & VALUE CHAIN COSTING
2- life cycle Cost Management ( LCCM)
* LIFE CYCLE COSTING, OR WHOLE-LIFE COSTING,
LCC is the process of estimating how much money you will

spend on an asset over the course of its useful life.
But ,
LCCM,it helps management to understand the cost

consequences of developing and making a product and to
identify areas in which cost reduction efforts are likely to be
most effective.
LCCM , branch out 2 types costs
A-Committed or locked-in costs :
• those costs that have not been incurred but that will be incurred in the future on the
basis of decisions that have already been made , it determine the future costs that will
be incurred during the manufacturing stage .
•80 % of a product’s costs are committed during the planning and design stage. At this
stage, product designers determine the product’s design and the production process,
that mean, many of these costs also become committed at the planning and design
stage.
•20 % latter stage, (Product manufacturing and sales phase), the focus is more on cost
containment than cost management.
•Target costing, a technique that focuses on managing costs during a product’s

planning and design phase.
B-Costs incurred : it is a cost for which a business has become liable to create Assets ,
and the organization will not be able to reduced it frugally
3- JUST-In-Time SYSTEMS (lean manufacturing systems)
" Nothing is purchased or produced until it is needed" .
Features of JIT :
1-Reducing waste by producing the required items, at the

required quality and in the required quantities, at the precise
time at which they are required.
2-keeping the materials moving in a continuous flow with no

stoppages and no storage .. (inventories is closer to be zero)
3-The rearrangement of the production process cells.

4- Benchmarking
It's an approach identify the best way of

performing activities and business
processes , which involves comparing key
activities or processes with best practices
found within and outside the organization.
Target Costing -4
4.1 The Origin Of Target Costing
US or Japan
•US, 1930s - 1950:
Target Costing can be found without an experimental concept as
early as the beginning of the last century at Ford in the United
States and in the development of the Volkswagen Beetle in
Germany in the 1930s.,At Volkswagen, in order to meet the price
goal of DM 990, alternative technical solutions were weighed on
the basis of cost considerations .
•Target costing approach began during the period of scarce

resources after World War II. During this time, Americans created
a concept of maximizing desirable product attributes while at the
same time minimizing product costs . So the technique became
known as “value engineering”.
• Japan 1960s (“genka kikaku)
The technique, "value engineering” was subsequently adopted
by Japanese companies in order to withstand stiff competition
within Japan.
• value engineering was combined with the idea of influencing
and reducing product costs as early as possible during the
planning and development stages of a product , and it occurred
at Toyota in 1963. So This practice has been titled as " “genka
kikaku" ( Target Cost ).
• Post - 1990s
The term has been generally accepted in the Western world. At
the annual meeting of the Japan Cost Society in 1995, the official
name was made “target cost management”.
4.2 The Definitions Of Target Costing
•Kaplan : The target cost is defined as the difference

between the target selling price and the target profit
margin., This relationship for the target costing
approach is shown in the following equation:
Ctc = Stc – Ptc
•Drury : target costing , it is deployed during a
product’s design and planning stage so that it can have
a maximum impact in determining the level of the
locked-in costs , & it’s the reverse of this process of
using the common approach cost-plus pricing approach.
•Target costing can be defined as a cost management tool for
reducing the overall cost of a product over its entire life cycle with
the help of production, engineering, R&D, marketing and
accounting departments.”
•Target costing is defined as a companywide profit management

activity during the new product development stage that includes:
-planning products that have customer-pleasing quality.
-determining target costs (including target investment costs) for the

new product to yield the target profit required over the medium to
long term given the current market conditions.
-devising ways to make the product design achieve target costs

while also satisfying customer needs for quality and prompt
delivery.”
4.3 stages of Target costing
Stage 1: Determine the target price that customers will be

prepared to pay for the product.
•determine the customers’ perceived value of the product.

•Analyze competing products and the price of competing
products.
.
Stage 2: Deduct a target profit margin from the target price to
determine the target cost.
Stage 3: Estimate the actual cost of the product.

Stage 4: compare the target cost with the predicted
actual cost
•Good Job if TC= AC or ,less than
•Upsetting , If estimated actual cost exceeds the

target cost,……
investigate ways of driving down the actual cost to

the target cost.
4.4 Traditional U.S. Cost Reduction Vs. Japanese Target Costing
A Comparison of the Process of Traditional U.S. and Japanese Cost Reduction Methods
A- US cost reduction
US . Step 1 : It starts with market research into customer

requirements for the new product.
US . Step 2 : engineers determine the product’s specifications

(designing) to deliver the desired performance, They then
perform detailed product design ,) and engineering for the
product to meet its specifications
.
US. Step 3 : Supplier Pricing , the development team requests
prices from raw materials and component suppliers, and
production cost estimates from manufacturing engineers.
•
US … the Previous step leads to the first estimate of the
product’s cost , & the team estimates the product’s
profit margin (Pt) by subtracting the estimated cost
from the expected selling price (St), which has also
been determined during the initial market research.
s the product’s cost product’s profit margin
e expected selling price

•Weak points :
- product development engineers do not attempt to

actively influence the product’s cost.
-They design and re - design the product to meet its

specifications and accept the costs as the consequence
of their design and development decisions.
B-Japanese Target Costing
-J .step 1 : It starts with market research into

customer requirements for the new product, and the
price they are willing to pay for a product (price
point ).
-J .step 2 : Analyzing the Target selling price & the

target product volume for a specific profit (CVP).
- J. step 3 : Determine the Target profit , The target

profit margin results from a long-run profit analysis
that is often based on return on sales (net income /
sales).
. step 4 : Determine the Target Cost ,
expected
Target profit Target Cost
selling price
J . Step 5 : The value engineering process , it The

value engineering process examines the design of
each component to determine whether it is possible
to reduce costs while maintaining functionality and
performance. In some cases, the engineers can
change the product’s or component’s design,
substitute new materials, or modify and improve the
manufacturing process.
4.5 Sub-Techniques of the Target cost
•Reverse engineering (tear-down analysis)

The competitor’s product is dismantled to identify its
functionality and design and to provide insights about the
processes that are used and the cost to make the product .
•value engineering / Value analysis

The aim of value analysis is to achieve the assigned target cost by
1- identifying improved product designs that reduce the
product’s cost without sacrificing functionality .
2-eliminating unnecessary functions that increase the product’s

costs and for which customers are not prepared to pay extra.
3-increasing functionality without increasing cost.
4-simplifying the product.
•Kaizen Costing
Genka kaizen” is another integrated part of the

Japanese cost management system, which is directly
linked to target costing systems, and it focuses on
decreasing costs in the production phase.
Kaizen is the Japanese term for making continuous

improvements to processes through small incremental
amounts , rather than through major innovations . So ,
it is applied during the manufacturing stage of the
product life cycle.
Features of KC :
•focuses on the production processes

(manufacturing stage).
•the potential cost reductions are smaller with

kaizen but the gradual cumulative
improvements over the longer-term can be
significant .
•Workers in (manufacturing stage) are given

the responsibility to improve processes and
reduce costs.
M-Total-Life-Cycle & target costing
4.6 Concerns about Target Costing
some studies of target costing indicate potential problems in
implementation :
1-Lack of understanding of the target costing concept. For many

in the companies, target costing is not a mainstream concept.
Without a clear understanding of the benefits, many senior
executives reject the idea.
2-Poor in the implementation of the teamwork concept , Some of

the team extend more effort to shape the product's value, and
another team doesn't care.
3-Rejection by suppliers about material prices as a result of

company pressure .
4- Employee burnout. , design engineers in Japanese
companies, work under continual pressure to meet target
costing goals and eventually experience burnout from the
pressure and become far less effective in their jobs.
5-Overly long development time. Although the target cost

might be met, development time may increase because of
repeated value engineering cycles to reduce costs,
ultimately leading to the product coming late to market.
6-Trade-off between the benefit and the cost, if the cost

prevails over the benefit of using the target cost, then this
Approach has no add -value, and it often may not be
compatible with the small companies.
4.7 Advantage of adopting target costing
1-Target costing is that it is deployed during a

product’s design and planning stage so that it can have
a maximum impact in determining the level of the
locked-in costs .
2-Target costing gives a warning of a loss , If the target

cost cannot be attained then the product should not
be launched.
3-Target costing can also be used as a cost

management tool and customer value creation tool.
4-The information provided of TC meet the cost of the
strategy-oriented management requirements towards the
market (customer).
5-Enhance the quality of the products offered by the

economic unity and wants customers purchased.
6-Achieve the goal of lowering the cost without

compromising the characteristics of quality that suit the
customer uses.
7-Enhance the roles of team work (multi-functional

disciplines responsible) in the value chain to achieve the
target quality at the lowest possible cost and maintain a
competitive sustainable advantage as work teams.
8-Involve customers and suppliers in the value chain that
contribute to the implementation of the development,
design, manufacture and provide product operations
and special activities.
9-Improve the performance of operations R & D and

engineering in order to provide new ideas and designs
contribute to enhancing the competitiveness of strategic
economic unit and maximize its competitive position in
the market.
10-Integration with other strategic cost management

techniques such as (Kazien), (Benchmarking), (ABC) and
(TQM) to increase the efficiency of performance.
Thank you

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Strategic Cost Management , Target Costing

why strategic cost management ?

1-competitive advantage , it aims to provide a competitive advantage by creating

2-cost reduction, it is oriented approach that focuses on cost reduction and

hint : the essential considerations of the strategic cost management

TECHNIQUES RELATED TO STRATEGY COST MANAGEMENT

* LIFE CYCLE COSTING, OR WHOLE-LIFE COSTING,

LCC is the process of estimating how much money you will

LCCM,it helps management to understand the cost

•Target costing, a technique that focuses on managing costs during a product’s

" Nothing is purchased or produced until it is needed" .

1-Reducing waste by producing the required items, at the

2-keeping the materials moving in a continuous flow with no

3-The rearrangement of the production process cells.

It's an approach identify the best way of

•Target costing approach began during the period of scarce

•Kaplan : The target cost is defined as the difference

•Target costing is defined as a companywide profit management

-planning products that have customer-pleasing quality.

-determining target costs (including target investment costs) for the

-devising ways to make the product design achieve target costs

Stage 1: Determine the target price that customers will be

•determine the customers’ perceived value of the product.

Stage 3: Estimate the actual cost of the product.

•Upsetting , If estimated actual cost exceeds the

investigate ways of driving down the actual cost to

US . Step 1 : It starts with market research into customer

US . Step 2 : engineers determine the product’s specifications

s the product’s cost product’s profit margin

e expected selling price

- product development engineers do not attempt to

-They design and re - design the product to meet its

-J .step 1 : It starts with market research into

-J .step 2 : Analyzing the Target selling price & the

- J. step 3 : Determine the Target profit , The target

J . Step 5 : The value engineering process , it The

•Reverse engineering (tear-down analysis)

•value engineering / Value analysis

2-eliminating unnecessary functions that increase the product’s

Genka kaizen” is another integrated part of the

Kaizen is the Japanese term for making continuous

•focuses on the production processes

•the potential cost reductions are smaller with

•Workers in (manufacturing stage) are given

1-Lack of understanding of the target costing concept. For many

2-Poor in the implementation of the teamwork concept , Some of

3-Rejection by suppliers about material prices as a result of

5-Overly long development time. Although the target cost

6-Trade-off between the benefit and the cost, if the cost

1-Target costing is that it is deployed during a

2-Target costing gives a warning of a loss , If the target

3-Target costing can also be used as a cost

5-Enhance the quality of the products offered by the

6-Achieve the goal of lowering the cost without

7-Enhance the roles of team work (multi-functional

9-Improve the performance of operations R & D and

10-Integration with other strategic cost management

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