TARGET COSTING... What Is It?
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TARGET COSTING** $ ** These slides have been developed jointly with CAM-I and include material covered in the book Target Costing: The Next Frontier In Strategic Cost Management By: Shahid Ansari Jan Bell and The CAM-I Target Cost Core Group Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING ... A Case for Action Global competition with mobile capital Technology leadership no longer provides lasting competitive edge Pressure for lower prices Shorter product life cycles Demand for custom products Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING ... The new competitive environment Global competitiveness requires balancing quality, cost, and time Time Target costing focuses on all three dimensions of the strategic triangle Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... State of the Art in the U.S. US Companies 67% use cost plus pricing Cost estimates need great improvements Estimate of sales volume provided to suppliers are overstated between 11-25% No tight monitoring of profits, costs, capital investment, quality, development budget, and performance. Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. Japanese Companies 100% used price minus profit Achieve 80% accuracy of cost estimates at product concept stage Estimate of sales volume provided to suppliers are within +/-5% Tight monitoring of profits, costs, capital investment, quality, development budget, and performance. TARGET COSTING... What Is It? A target cost is the allowable amount of cost that can be incurred on a product and still earn the required profit from that product A strategic profit and cost management process Price-led Customer-focused Design-centered Cross-functional Life cycle oriented Value Chain-based Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Managing committed costs 100 Committed Costs Costs 80 60 40 Incurred Costs 20 0 PRODUCT CONCEPT DESIGN AND DEVELOPMENT PRODUCT PRODUCTION DISTRIBUTION SERVICE DISPOSITION DEVELOPMENT CYCLE Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... A Different Profit Planning Approach Cost Target Plus Market considerations not part of cost planning. Costs determine price. Waste and inefficiency is focus of cost reduction efforts. Cost reduction is not customer driven. Cost accountants manage costs. Suppliers involved after product designed. Minimizes initial price paid by customer. Little or no involvement of value chain in cost planning. Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. Costing Competitive market considerations drive cost planning. Price determines costs. Cost reduction is achieved by simultaneous product/process design. Customer input guides cost reduction. Cross-functional teams manage costs. Suppliers involved in concept and design of product. Minimizes cost of ownership to customer. Involves the value chain in cost planning. TARGET COSTING... In the Product Development Process VOICE OF THE CUSTOMER Market Research ESTABLISH TARGET COSTS ATTAIN TARGET COSTS Competitive Strategy Product Strategy and Profit Plans Product Concept & Feasibility Product Design & Development Competitive Intelligence EXTENDED ENTERPRISE PARTICIPATION Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. Production and Logistics TARGET COSTING... Setting Target Costs Market Market Research Research MARKET PRICE Define Product/ Customer Niche Understand Customer Requirements Competitor Competitive Analysis Analysis Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. Define Product Features TARGET COST REQUIRED PROFIT $ TARGET COSTING... Voice of the Customer Develop a market-focused mindset – Open-minded, inquisitive, take nothing for granted, share what you learn Solicit customer information – Panels, focus groups, interviews, surveys Analyze customer feedback – Profiles, charts, maps, tables Understand completely what the customer truly values – Features and cost determine value Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Listening to the customer? Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Price and Profit Margin Pricing is dynamic Multi-year – Collectively consider Product competitor prices, market and Profit Plan share goals, and customer’s acceptable price. Required Price - Profit Compute profit over the life of a Profit product – Profit targets may change ALLOWABLE each year TARGET COST Target margins must consider firm’s required financial rate of Copyright, Ansari, Bell, Klammer and Lawrence, Management return Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. Market Price TARGET COSTING... Who Participates Major cross-functional teams –Business Planning Team –Product Team –Design Team –Product Manufacturing Team Team and functional coordination Supporting infrastructure Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Linear Product Design! Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Involving the Value Chain TIER THREE SUPPLIERS TIER TWO SUPPLIERS TIER ONE SUPPLIERS SERVICE & SUPPORT PRODUCER SUPPLIERS DISTRIBUTORS CUSTOMERS RECYCLERS/ DISPOSERS OPTIMIZING THE SUPPLY CHAIN Characterize the Supply Chain Nature and number of suppliers Distance from the producer Develop Long Term Relationships Involve Suppliers in Design Maintain Margins Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. EXPECTED CONTRIBUTIONS Better Focus on Customer Requirements Provide Input and Ideas Early in the Concept Formation Stage Eliminate Non-Value Added Activities Pursue Standardization TARGET COSTING... Achieving Target Costs COMPUTE COST GAP Initial Cost Estimate s Compare To Target Cost DESIGN COSTS OUT Design Products/ Processe s Perform Value Engineerin g Perform Cost Analysis Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. PRODUCE Estimate Achievabl e Cost ACTUAL COST Release Design to Productio n Undertake Continuous Improvemen t TARGET COSTING... Information Requirements COMPETITIVE INTELLIGENCE MARKETING DATA COST DATA TARGET COST INFORMATION PROCUREMENT DATA Information not routinely collected. Existing information not routinely available. Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. ENGINEERING DATA TARGET COSTING... Typical Information Gaps PRODUCT STRATEGY CONCEPT AND FEASIBILITY DESIGN AND DEVELOPMENT PRODUCTION & LOGISTICS Product Development Cycle (When tools are used) Customer & Marketing Competitive Prices and Features Product Life-cycle Engineering Systems Feature/Price Data Attribute/Price Data Feature/Cost Data Cost systems Competitor Cost Technology Life Cycle Procurement Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. Attribute/Cost Data Function Cost Data Component Interaction VE Case Studies Supplier Cost Data Improvement Ideas Database Type of Information needed Competitive Intelligence TARGET COSTING... Supporting Tools PRODUCT STRATEGY CONCEPT AND FEASIBILITY DESIGN AND DEVELOPMENT PRODUCTION & LOGISTICS Product Development Cycle (When tools are used) Functional Expertise for Tools Planning Marketing Multiyear Product Plan Multiyear Product Plan Benchmarking QFD Cost Tables Feature Costing QFD Function Cost Component Cost Process Costing Engineering Value Engineering DTC QFD Value Engineering DFMA, DTC QFD Procurement Supplier Based Value Engineering Supplier Based Value Engineering Costing Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. Value Analysis TARGET COSTING... Extending The Domain Many service industries (e.g. telecommunications) are design driven and can use target costing. The design philosophy of target costing can be broadly applied to many nonmanufacturing situations. The customer value approach of target costing provides a useful strategic umbrella for ABM and BPR leading to an integrated cost management approach. Target Costing can be used to address legacy Copyright, Ansari, Bell, Klammer and Lawrence, Management redesign. costs through creative Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Does It Work? CHRYSLER’S RESULTS -- 1994 Meets customer requirements for safety and driveability Neon named “Auto of the Year” in 1994 Short development time (concept to market 31 months) Below projected development and investment budget Neon one of few small cars that earns a positive return Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Does It Work? CHRYSLER’S RESULTS -- 1995 Chrysler's share price $10 in 1990 to $54 in 1995 Since 1990, revenue increase 70% Market share increase by 2.1% Profits and cash flows increase 400% since 1990 Profit margin ratio up from 0.33% to 7.1% in 1995 Chrysler’s Truck Line (including Jeeps and Minivans) number one among US carmakers in “Power Survey.” Industry benchmark study finds Chrysler the low cost producer in North America for second straight year. Standard & Poors and Duff & Phelps raised credit ratings - first time since 1974 to “A” level. Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Does It Work? CHRYSLER’S RESULTS -- 1996 Industry Sales Above Trend Stock Levels -- Well Positioned for Launch of 1997 Models Relatively Stable Incentives Labor Contract New Products Full Wrangler Production All New Dakota -- Very Well Received By Automotive Press Jeep Cherokee Update Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Critical Success Factors POLITICAL Accommodate legitimate interests Obtain “buy-in” from major groups Avoid turf battles TECHNICAL/ STRUCTURAL BEHAVIORAL Early functional involvement Engineering owns costs Marketing evaluates trades Targets are commitments Cross-functional cooperation Accounting as “business advisor” LEADERSHIP New data New tools Cross-functional teams New business processes Revised career paths Partnerships in value chain CULTURAL Open information sharing Customer focus Cross-functional teamwork Bell, Trust Copyright, Ansari, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
