TARGET COSTING

1

TARGET COSTING AND THE PRODUCT DEVELOPMENT CYCLE

Market
Research

ESTABLISH TARGET
ATTAIN TARGET

Competitive
Strategy

Product Strategy and Profit Plans

Product
Concept &
Feasibility

Product
Design &
Development

Production and Logistics

Competitive
Intelligence

2

THE ESTABLISHMENT PHASE OF TARGET COSTS

MARKE

Marke
Market
Researc
Research

PRIC
Define
Customer Niche

Competitiv
Competitor
Analysi
Analysis

Understand
Customer
Requirements

Define
Product
Features

TARGET
COST

$

REQUIRED
PROFIT

3

THE ATTAINMENT PHASE OF TARGET COSTING

COMPUTE COST GAP

DESIGN COSTS OUT

PRODUCE

Perform
Value
Engineering
Initial
Cost
Estimates

Compare
To Target
Cost

Design
Products/
Processes

Estimate
Achievable
Cost
Perform
Cost
Analysis

ACTUAL
COST

Release
Design to
Production

Undertake
Continuous
Improvement

4

1. Self-Test Questions (p. TC—32)
a. What is a target cost? How is it different from a budgeted cost?
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. It is a market driven cost that is computed before a product is produced. A budgeted cost is a predetermined cost after a product is in production. A budget is an operational definition of an allowable cost broken by items and by periods.
c. Why is it important to manage costs before products have been produced?
Nearly 80% of the costs of many products are committed at the design stage. Therefore, the best opportunity to reduce costs is during design and not after a product is being manufactured.
f. At what stage of the product development cycle does target costing play a key role?
Target costing occurs within the product development cycle. This means it starts when a product is