Target Costing

Robin Cooper and Regine Slagmulder Editors’ Note: This commodity is an adapted amalgam of all-embracing explorations independent in Ambition Costing and Bulk Engineering, by Robin Cooper and Regine Slagmulder (Portland, Oregon: Abundance Press, 1997). Allotment two of the alternation discusses product-level ambition costing; allotment three, to be featured in an accessible issue, will abode component-level ambition costing. omers. Consequently, the cold of product-level ambition costing is to access the adequate bulk of the artefact to a akin that can analytic be accepted to be achievable, accustomed the capabilities of the close and its suppliers (see Exhibit 1). EXECUTIVE SUMMARY• Product-level ambition costing works to access the adequate bulk of the artefact to a akin that is both reasonable and accessible accustomed the capabilities of the close and its suppliers. Footfall one establishes the ambition bulk by accumulation the adequacy of the close and its suppliers into the adequate bulk so that an accessible product-level ambition bulk is established. • Footfall two uses bulk engineering to analyze means to architecture the artefact so that it can be bogus at its ambition cost. • Footfall three applies the adorning mechanisms to advice ensure that the product-level ambition bulk is achieved. The ambition costing action contains three aloft sections: market-driven costing, product-level ambition costing, and component-level ambition costing.In allotment two of a three allotment series, this commodity discusses how product-level ambition costing works to access the adequate bulk of the artefact to a akin that is both reasonable and accessible accustomed the capabilities of the close and its suppliers, in a three footfall process. Footfall one establishes the ambition bulk by accumulation the adequacy of the close and its suppliers into the adequate bulk so that an accessible product-level ambition bulk is established.Step two uses bulk engineering to analyze means to architecture the artefact so that it can be bogus at its ambition cost. Footfall three applies the adorning mechanisms to advice ensure that the product-level ambition bulk is achieved. PRODUCT-LEVEL TARGET COSTING The cold of product-level ambition costing is to authorize advancing but accessible product-level ambition costs. These ambition costs should abode ample burden on the firm’s artefact engineers to acquisition artistic means to abate the accomplishment costs of the articles that they are designing.Target costs adapt from adequate costs, because they absorb the capabilities of the close and its suppliers into the ambition costing process. In practice, it is not consistently accessible for the designers to acquisition means to accomplish the adequate bulk and still amuse the firm’s cus1 Product-level ambition costing can be burst into three accomplish (see Exhibit 2). In the aboriginal step, the product-level ambition bulk is established. This footfall consists of accumulation the adequacy of the close and its suppliers into the adequate bulk so that an accessible product-level ambition bulk is established. The added footfall consists of appliance bulk engineering (and accession agnate techniques) to analyze means to architecture the artefact so that it can be bogus at its ambition cost. In the third step, the adorning mechanisms of ambition costing are activated to advice ensure that the product-level ambition bulk is achieved. The adorning mecha- Commodity 32. TARGET COSTING FOR NEW-PRODUCT DEVELOPMENT: PRODUCT-LEVEL TARGET COSTING thereof crave that the close charge abate costs if it is to advance its adapted akin of profitability.The bulk of bulk abridgement adapted to accomplish the adequate bulk is alleged the cost-reduction cold and is acquired by adding the adequate bulk from the accepted artefact cost: Cost-Reduction Cold = Accepted Cost–Allowable Bulk The accepted bulk is the bulk of a new artefact if it were bogus today appliance absolute apparatus or variants thereof. No cost-reduction activities are affected in accretion the accepted bulk of the product. For the accepted bulk to be meaningful, the apparatus acclimated in its admiration charge be absolute agnate to those that eventually will be acclimated in the new product. If the absolute archetypal uses a 1. 8-liter agent and the new archetypal uses a 2. 0-liter one, for example, accepted bulk would be estimated appliance the bulk of the best agnate 2. 0-liter agent currently produced by the firm. Because the adequate bulk is acquired from alien altitude after appliance of the firm’s centralized architecture and accumulation capabilities, there is a accident that the adequate bulk will not be achievable. In this case, to advance the conduct of ambition costing, the close charge analyze the accessible and unachievable genitalia of the cost-reduction objective.Analyzing the adeptness of the artefact designers and suppliers to abolish costs from the artefact (see Exhibit 3) derives the accessible or ambition cost-reduction objective. The action by which costs are removed from the artefact is alleged bulk engineering, and it depends heavily on an alternate accord with the suppliers. The purpose of this accord is to acquiesce the suppliers to accommodate aboriginal estimates of the affairs prices of their articles and, back possible, insights into accession architecture possibilities that would accredit the close to bear the adapted akin of functionality and affection at bargain cost.The unachievable allotment of the cost-reduction cold (referred to in Exhibit 2) is alleged the basal cost-reduction challenge. It identifies the accumulation arrears that will action back the designers are clumsy to accomplish the adequate cost—a arresting that the close avalanche abbreviate of the capabilities accepted by advancing conditions. Typically, in a close with a absolute ambition costing system, the basal cost-reduction claiming will be baby or nonexistent, and acute burden will be brought on the architecture aggregation to abate it to zero.For the best able firms, the accessible bulk abridgement for a artefact ability beat the cost-reduction objective. Such firms do not face a basal cost-reduction challenge. They can booty advantage of their aloft capabilities by abbreviation the affairs bulk of the artefact to access bazaar share, by accretion artefact functionality while advancement the targeted affairs price, or by befitting both bulk and functionality at their targeted levels to acquire college profits. To advance the conduct of ambition costing, the admeasurement of the basal cost-reduction claiming charge be managed carefully.A basal cost-reduction claiming should reflect the accurate disability of the close to bout adversary capabilities. To ensure that the basal cost-reduction claiming meets this requirement, the ambition cost-reduction cold charge be set so that it is 2 nisms accommodate advance ecology and validation and the appliance of the basal aphorism of ambition costing: articles whose accomplishment costs are aloft their ambition costs should not be launched. The ecology and validation action helps ensure that the accumulation articular through bulk engineering are absolutely achieved.The appliance of the basal aphorism ensures that the conduct of ambition costing is maintained. Back designers apperceive that ambition bulk violations advance to austere consequences, they are subjected to a absolute burden to accomplish the ambition costs. SETTING THE PRODUCT-LEVEL TARGET COST In awful advancing markets, barter apprehend anniversary bearing of articles to accept college bulk than that of their predecessors. Bulk can be added by convalescent the affection or functionality of the firm’s articles or by abbreviation their affairs prices. Any of these improvements or some combinationANNUAL EDITIONS cost-reduction challenge, which creates a able burden on the architecture aggregation of the abutting bearing of the artefact to be alike added advancing about bulk reduction. In this way, the abortion to accomplish the adequate bulk this time about is angry into a claiming for the future, not a abiding defeat. Second, adequate bulk avoids abrasion the basal rule, which applies alone to ambition costs, not adequate costs. The action by which the basal cost-reduction claiming is accustomed charge be awful disciplined.Otherwise it becomes a apparatus to abate the capability of ambition costing by ambience ambition costs that are too accessible to achieve. In best firms, top administration approves the basal cost-reduction claiming afore the product-level ambition bulk can be set. Technically, the ambition bulk of a artefact is the ambition affairs bulk beneath the ambition accumulation allowance added the basal cost-reduction challenge. Many firms becloud the acumen amid the adequate bulk and the ambition cost, however, by advertence that the ambition bulk is bent by adding the ambition accumulation allowance from the ambition affairs price.This description makes it easier for bodies to accept the spirit of ambition costing as actuality bulk driven. Obviously, if the basal cost-reduction claiming is zero, the adequate and ambition costs are identical. At some firms, alike back the adequate bulk is advised achievable, it is not referred to as a ambition bulk until the action has accomplished the date at which the aloft basal ambition costs are established. The assimilation of the appellation “allowable costs” shows that top administration is not accommodating to adjure the basal aphorism until it is assertive that the ambition bulk is absolutely achievable. chievable alone if the absolute alignment makes a cogent accomplishment to ability it. Consistently ambience the ambition cost-reduction cold too aerial can advance to workforce addict and, ultimately, the conduct of ambition costing will be lost. Conversely, if the ambition cost-reduction cold is consistently set too low, the close will lose competitiveness, because new articles will accept badly aerial ambition costs. Again apropos to Exhibit 2, the product-level ambition bulk is bent by adding the proposed artefact ambition costreduction cold from its accepted cost.That is: Product-Level Ambition Bulk = Accepted Cost–Target Cost-Reduction Cold The basal cost-reduction claiming is bent by adding the adequate bulk from the ambition cost: Basal Cost-Reduction Claiming = Ambition Bulk –Allowable Bulk The bulk of adapted amid the adequate bulk and the ambition bulk in this address lies in the conduct that it creates. In best firms, the adequate bulk will sometimes be too low to achieve, accustomed the about capabilities of the close and its suppliers compared to competitors and their suppliers.Target costing systems acquire their backbone from the appliance of the basal rule, “The ambition bulk charge never be exceeded. ” If a close continuously sets over-aggressive ambition costs, violations of the basal aphorism would be accepted and the conduct of the ambition costing action would be lost. Alike worse, if the adequate bulk is accepted to be unachievable, the architecture aggregation ability accord up alike aggravating to accomplish it, and able bulk abridgement during artefact architecture would cease. To abstain this action problem, firms frequently set ambition costs college than the adequate costs.These ambition costs are advised to be accessible but alone with ample effort. They acquiesce the basal aphorism to be maintained for about every product. Consequently, the acumen amid adequate and productlevel ambition costs plays two roles. First, it identifies the basal 3 ACHIEVING THE PRODUCT-LEVEL TARGET COST Already planners accept articular the ambition cost-reduction objective, the added date of product-level ambition costing begins— accomplishing it (see Exhibit 4). Several engineering techniques can advice artefact designers acquisition means to abate the costs of products.They accommodate bulk engineering, architecture for accomplish and assembly, and affection action deployment. Bulk engineering, the best important of the three techniques, has the primary cold of maximizing chump value—it tries to access functionality and affection while at the aforementioned time abbreviation cost. In contrast, DFMA focuses on abbreviation costs by authoritative articles easier to accumulate or manufacture, while captivation functionality at authentic levels. Finally, QFD provides a structured access to ensure that chump requirements are not compromised during the architecture process.Target costing and bulk engineering can be beheld as circumstantial activities, as can kaizen costing and VA. The appliance of bulk engineering begins with the abstraction of the artefact and continues through the architecture action until the artefact is appear to manufacturing. Alike again the action continues, but beneath the name bulk assay (VA). Commodity 32. TARGET COSTING FOR NEW-PRODUCT DEVELOPMENT: PRODUCT-LEVEL TARGET COSTING The aberration amid VA and VE is not in the access taken or the accoutrement acclimated but the point at which they action in the activity aeon of the product.VE is acclimated during the artefact architecture and development stages, and VA is acclimated for the accomplishment date and for purchasing parts. For this reason, ambition costing and bulk engineering can be beheld as circumstantial activities, as can kaizen costing and VA. It would be amiss to appearance VE as aloof accession cost-reduction program. VE is primarily about artefact functions and alone secondarily about cost. The affective force abaft VE is to ensure that the artefact achieves its basal action in a way that satisfies the chump at an adequate cost.Consequently, VE programs are the area of the artefact engineer, not the accountant. bility of the absolute functions. Second-look VE is activated during the aftermost bisected of the planning date and the aboriginal bisected of the development and artefact alertness stage. The cold of second-look VE, clashing that of zero- and first-look VE, is to advance the bulk and functionality of absolute components, not actualize new ones. Consequently, the calibration of changes is abundant abate than for zero- and first-look VE. Allusive applications of VE abide of disturbing bottomward accession articles to analyze new means to abate costs. We ascertain breach bottomward as “a allusive VE adjustment through beheld ascertainment of disassembled equipment, parts, and abstracts abiding in a address adequate for such observation. ” Numerous approaches to breach bottomward exist. The six ascendant techniques are: 1. 2. 3. 4. 5. 6. Dynamic. Cost. Material. Static. Process. Matrix breach down. VE Techniques The VE techniques can be burst into three aloft categories: 1. Absolute appliance of VE attempt to the product. 2. Breach bottomward approaches appliance allusive VE. 3. Assorted VE. VE can be activated anon to proposed articles at altered stages of the artefact architecture process. These altered approaches are accepted as “looks. ” Zero-look VE is the appliance of VE attempt at the abstraction angle stage, the ancient date in the architecture process. Its cold is to acquaint new forms of functionality that did not ahead exist. First-look VE focuses on the aloft elements of the artefact architecture and is authentic as developing new articles from concepts. The cold is to enhance functionality of the artefact by convalescent the capa4 The aboriginal three methods are advised to abate a product’s absolute accomplishment costs.The abutting three are advised to abate the advance adapted to accomplish the artefact through added productivity. There are at atomic four assorted cost-reduction techniques: 1. 2. 3. 4. The account method. The one-day cost-reduction meeting. Mini VE. The VE believability program. ANNUAL EDITIONS Checklists The account adjustment is acclimated to analyze a product’s bulk factors and to advance means to abate costs. The account consists of a basal of questions advised to adviser the firm’s cost-reduction activities by advertent cost-reduction opportunities.Checklists advice ensure assay of all accessible avenues for bulk reduction. One-day cost-reduction affairs are advised to advance the ability of the absolute cost-reduction process, including VE and breach bottomward methods. Participants from engineering, production, cost, and sales are accepted to appear up with account for new costreduction possibilities. The affairs are a way to affected limitations in the approval action acclimated for best cost-reduction proposals. The approval action entails circulating accounting proposals to all complex parties, who announce accepting by signing off on them. Unfortunately, this access acutely reduces the barter of advice and modification of ideas. At the oneday meetings, presentation of the after-effects of assorted tear-down programs helps admit discussions. production/sales-preparation stage, and the production/salespreparation stage. DISCIPLINING THE PRODUCT-LEVEL TARGET COSTING PROCESS Adorning the product-level ambition costing action begins with ecology and acceptance the advance of the architecture engineers adjoin extensive the cost-reduction objective.It is at this date in the action that the basal aphorism of ambition costing is applied. Alone back accepting the artefact to bazaar is so acute that bulk is of accessory appliance should the basal aphorism be violated. Finally, back the artefact is appear for accumulation accumulation and its absolute bulk of accomplishment can be measured, accomplish sometimes accept to be taken to abate those costs to the ambition level. Already the ambition cost-reduction cold has been established, the action of designing the artefact so that it can be bogus at its ambition bulk can commence.The conduct of ambition costing requires that the arch architect and his or her superiors continuously adviser and validate that the advance the architecture engineers are authoritative adjoin this objective. This ecology ensures that antidotal accomplishments can be taken as calmly as accessible and that the basal aphorism will not be broken. Some firms ascertain an as-if bulk at this point in the development process. The as-if bulk reflects cost-reduction opportunities articular back the antecedent bearing of the artefact was actuality advised or manufactured. In best cases, the as-if bulk is aloft the ambition bulk of the new artefact but beneath its accepted cost.The added bulk that charge be accomplished is authentic as the aberration amid the ambition bulk and as-if cost. As the architecture action gain and costs are removed from the aloft functions, the estimated accomplishment bulk gradually 5 Mini VE and VE Believability Mini VE is a simplified access to second-look VE. It is activated to specific areas of a allotment or to absolute small, bargain parts. Mini VE is activated during the development and artefact alertness stages, the development and production-sales alertness stage, and the production-sales alertness stage.A VE believability affairs is advised to ensure that the best adapted anatomy of VE is activated to anniversary problem. Essentially, it is a “quality of VE” program. If a absolutely new artefact architecture is required, for example, applying second-look VE is not appropriate. Like mini VE, the affairs is activated during the development and product-preparation stages, the development and Commodity 32. TARGET COSTING FOR NEW-PRODUCT DEVELOPMENT: PRODUCT-LEVEL TARGET COSTING avalanche adjoin the ambition cost. Many firms alarm the adapted appraisal the afloat bulk (see Exhibit 5).Thus, the artefact architecture action starts with an as-if bulk college than the ambition bulk and above the architecture action reduces the accepted or afloat bulk until it alcove the ambition cost. At best firms, already the afloat bulk equals the ambition cost, cost-reduction activities cease. There is no accolade for accomplishing greater accumulation than those adapted to accomplish the ambition cost. The engineers’ time is bigger spent on accepting the afloat bulk of accession articles to according their ambition costs. estrictive, because the artefact beneath assay causes added revenues to be generated above those generated by the artefact itself. Such articles accommodate flagship articles that actualize aerial afterimage for the firm, articles that acquaint the abutting bearing of technology, or articles that ample a analytical gap in the artefact line. For such products, the ambition bulk is generally airy to acquiesce for the “hidden” revenues. About typically, bulk abridgement pressures are still activated during the aboriginal stages of accomplishment until the ambition bulk is achieved.For the articles that affection a array of options, the final fine-tuning of the ambition bulk is generally accomplished by allegorical the appearance that the accepted artefact will contain. If the accomplishment bulk is too high, for example, one or added “standard” appearance ability be adapted to “options” that the chump now has to pay an added bulk to obtain. Converting appearance to options both reduces the bulk of accomplishment the accepted product, acceptance the ambition bulk to be achieved, and increases the affairs bulk of the originally authentic product, acceptance the ambition accumulation to be achieved.Obviously, the abridgement in the functionality of the accepted alternative charge be subjected to bazaar assay to ensure that it is adequate in the eyes of the chump at the ambition affairs price. An archetype ability accommodate the about-face of ancillary air accoutrements from a accepted affection to an alternative one. This abridgement in functionality will be adequate alone if advancing offerings amusement ancillary air accoutrements in the aforementioned way. This fine-tuning action gives firms added elbowroom to accomplish ambition costs set several years earlier. Similarly, the absolute affairs bulk is not anchored until aloof afore the artefact is launched.Delaying these two analytical decisions decidedly reduces the ambiguity that a firm, in a multiyear artefact development process, faces with account to accomplishing ambition costs. At best firms, already the afloat bulk equals the ambition cost, cost-reduction activities cease. The action of comparing the afloat bulk to the ambition bulk continues throughout the architecture process. Generally back the artefact is accessible to be appear to production, for example, planners undertake a final assay of the achievability of the ambition cost.If the estimated accumulation bulk is too high, the architecture is subjected to added analysis. Frequently, almost accessory changes in the product’s architecture are all that is bare to abate the bulk appraisal to the ambition bulk level. As continued as these changes do not adapt the product’s bulk point, the product’s functionality is bargain and the artefact is submitted for approval. If the architecture changes will abate the bulk point, the artefact is about alternate to the assay and development accumulation for design.The basal aphorism of ambition costing plays an important role in advancement the conduct of ambition costing. Great affliction is taken to ensure that the sum of the basal ambition costs does not beat the ambition bulk of the product. Often, an access in the bulk of one basal causes the engineers to analyze means to abate the costs of accession apparatus by an agnate amount. In addition, to advice ensure administration of the basal rule, best firms accept a action adjoin ablution barren or sub-profitable products.When the artefact architecture appearance is over, the artefact moves to manufacturing. As allotment of this alteration phase, the ambition bulk is compared to the accepted bulk of production. If the accepted bulk is higher, usually the close takes accomplish to abate accomplishment costs to the ambition level. Often, if the accepted bulk is at or beneath the ambition cost, the architecture of the artefact is arctic for the blow of its life, and no added actions, accession than accepted kaizen, are taken to abate the bulk of the new product.As with any rule, the basal aphorism occasionally is broken. It is abandoned back a broader assay indicates that breaking it will be benign for the firm. Ambition costing, by its nature, takes a single-product orientation. Sometimes, this appearance is too NEXT STEPS One of the key capacity of the product-level ambition bulk is the ambition costs of all of the outsourced components. These costs are the focus of the abutting footfall in the ambition costing process, component-level ambition costing.It is in this allocation of the ambition costing action that the conduct of ambition costing is continued to the supplier abject of the firm. Journal of Bulk Administration lath affiliate ROBIN COOPER is a assistant in the convenance of bulk administration at Roberto C. Goizueta Business School at Emory University and can be accomplished at (404) 7276679. REGINE SLAGMULDER is accessory assistant of accounting and ascendancy at INSEAD France. She can be accomplished at regine. slagmulder @insead. edu. From Journal of Bulk Management, July/August 2002, pp. 5-12. © 2002 by the Journal of Bulk Management. 6

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