A

PRESENTATION
ON
TARGET COSTING

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 TARGET COSTING
ORIGIN

The concept of TARGET COSTING had its origin in JAPAN in 1960 as

a result of difficult market conditions.

Due to proliferation of consumer and industrial products of western

firms in the ASIAN markets.

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 Definition
Target costing is a disciplined process for
determining and realizing a total cost at which a
proposed product with specified functionality
must be produced to generate the desired
profitability at its anticipated selling price in the
future.

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 Target costing is a formal process
to achieve the companys
profitability goals by,
Determining a price point (or range of prices)for an
approximation combination of features and benefits.

Subtracting a desired profit from the market price to

determine the maximum bearable level of costs.

Iterating the product design-eliminating or reducing

unnecessary attributes with costs that cant be recovered in
higher prices-until the cost target is met.

of changed market conditions.

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Revising the market price for the redesigned product in view
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 STAGES IN TARGET
COSTING
Identifying the product that satisfies the needs of the
potential customers.

Reaction of the competitors.

Determination of target price.

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 Cont..
Determination of target operating income per unit.

Deriving target cost per unit

Application of value engineering

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 Features of Target
Costing Process
It is an integral part of the design
and introduction of new products.
A target selling price is
determined using various sales
forecasting techniques.
Establishment of target
production volumes.

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Features (continued)
Determine cost reduction targets.

A fair degree of judgement.

A series of intense activities.

A team-based set up to achieve its objectives.

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OBJECTIVES
To lower the costs of new products so that the
required profit level can be ensured.
It emphasizes understanding the market and
competition
To motivate all company employees to achieve
the target profit

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 ADVANTAGES
Reduces development cycle of a product.

Reduces cost of products.

It enables the organization to face & stay in the ever growing

competitive environment.

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It aligns cost of features with consumers willingness to pay.
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 Problems

Development of process can be

lengthened.

A large amount of cost cutting can result

in finger pointing.

Sometimes difficult to reach a

conclusion

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 Target Costing- Example
Handy Appliance feels there is a niche for a hand
mixer with certain features.
Marketing Department believes that price of Rs30
would be right and that about 40,000 mixers could be
sold.
Rs2,000,000 invest required to gear up for production.
Company requires a 15 percent ROI on invested funds.
Determine the target cost.

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 Target Costing

Projected sales (40,000 units 30) 1,200,000

Desired profit (2,000,000 15%) 300,000
Target cost for 40,000 mixers 900,000

Target cost per mixer (900,000 40,000) 23

Each functional area within Handy Appliance

would be responsible for keeping its actual
costs within the target established for that
area.

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 Cont..
*c.a is responsible for bridging the gap between current cost and
target cost which is a design teams goal providing an itemisation
where cost saving has already been and where it is yet to be
done and where there is no sufficient degree of progress.

c.a must continue to compare a products actual cost after a

design is completed and till the company sells the product .

Impact of target costing (t.c) on profitability:*profitability is

affected depending on the commitment of management to its use
,constant involvement of a c.a in a products life cycle, and
type of strategy the orgn. follows .
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 Profitability can be
improved in two ways:
It places detailed continuing emphasis on product
costs throughout the life cycle of every product.
Through precise targeting of correct prices at
which company feels it can place a profitable
product in the market place that will sell in a
robust manner as against the earlier cost plus
method.

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 Companies using
Target Costing
Companies that use target costing : Although it is a relatively new
concept, it is being used heavily in most large companies especially
automotive and aerospace industry.
e.g:
General Electric

Motorola
U.S auto companies G.M

Ford and Daimler Chrysler.

Japans auto companies Toyota Honda ,Nissan , Mitsubishi
Nasa

U.S Military

Sony.
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