Welcome to

Our Presentation
Our Focus Area

▰ Target Costing
▰ Target Costing Process
▰ Market Driven Costing
▰ Product Driven Costing
▰ Value Engineering
▰ Component Level Costing

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 Presented by Group - 7

Sl No Name Roll No

01 Nasir Ahmed 21 AIS 041

02 Abdul Ahad khalifa 21 AIS 009

03 Tanziun Omar Zinnat 21 AIS 020

04 Md. Nazmul Hasan 21 AIS 033

05 Mamon Chakma 21 AIS 051

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 Target Costing
Target costing is a structured approach to determine the lifecycle cost at
which a proposed product with specified functionality and quality must be
produced to generate the desired level of profitability over its life cycle when
sold at its anticipated selling price.
Target Costing = Selling Price – Desired Profit

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Example

ABC Inc. is a big FMCG player that operates in a very competitive market.
It sells packaged food to end customers. ABC can only charge ₹20 per
unit. If the company’s intended profit margin is 10% on the selling price,
calculate the target cost per unit.

Solution: Target Profit Margin = 10% of 20 = TK 2 per unit

Target Cost = Selling Price – Profit Margin (TK 20 – TK 2)
Target Cost = TK 18 per unit

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Objective of target costing

▰ To lower the costs of new products so that the required profit level
can be ensured.
▰ The new products meet the levels of quality, delivery timing and price
required by the market.
▰ To motivate all company employees to achieve the target profit during
new product development by making target costing a companywide
profit management activity.

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Structure of Target Costing

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 Domain of Target Costing
▰ Target costing systems focus primarily on direct costs, they also can be used to
help reduce indirect costs. The big difference is that while direct costs can be
affected at the individual product level, indirect costs are reduced only by
changing the design of many products.

▰ Target costing identifies the costs at which future products must be manufactured
if they are to earn the desired level of profits. Once the product-level target costs
are set, then value engineering can be used to find ways to design the products so
that they can be manufactured at their target costs.

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 Market Driven Target Costing
▰ Purpose of market driven target costing is to identify the allowable cost of
future products
▰ It focuses on customers and their requirements

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Structure of Target Costing

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 Allowable Cost
▰ Allowable cost is the cost at which the product must be manufactured
if it is to generate the desired profit margins when sold at its target
price.
▰ Allowable cost = target selling price - target profit margin

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Steps of Market Driven Costing

▰ Setting long term sales and profit objectives

▰ Structuring the product lines

▰ Setting the target selling price

▰ Setting the target profit margin

▰ Setting the allowable cost

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Setting Long Term Sales and Profit Objectives

▰ Target costing begins with the long-term sales and

profit objectives of the firm

▰ Long-term plan is paramount in establishing the target

costing discipline

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Structuring the Product Lines

▰ Product lines must be designed carefully to ensure that they

satisfy customers but do not contain so many products that

they confuse customers
▰ Product lines are based on the way customer preferences

are changing over time

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Setting the target selling price

▰ Price is critical in driving the target costing process

▰ Target selling price has to be realistic

▰ Process of setting the target price is very thorough at

most firms
▰ Price is set by taking market condition into account

▰ Target selling prices are established within the context

of the firm's long-term sales and profit objectives.

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Setting the Target Profit Margin

▰ Target profit margin should be realistic

▰ Target profit margin should be adjusted for life cycle cost

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Setting the Allowable Cost

▰ Allowable cost reflects the relative competitive position of the firm

▰ Allowable costs are not benchmarks against which the firm can

measure itself compared to its competitors

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 Product Level Costing
▰ Focuses the creativity of the product designers on finding ways to
design products that satisfy the firm's customers at the allowable
cost.
▰ It is not always possible to achieve the allowable cost and still satisfy
the customers.
▰ Process of product-level target costing increases the allowable cost of
the product to a level that can reasonably be expected to be
achievable,

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Steps of Product Level Costing

Setting the product level target cost

Disciplining the product level target costing process

Achieving the target cost

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 Cardinal Rule of Cost Accounting
▰ The cardinal rule of target costing is that the target cost must never be
exceeded
▰ Three ways cardinal rule is enforced

▻ Whenever improvements in the design result in increased costs,

alternative, offsetting savings have to be found elsewhere

▻ Launching products whose costs exceed their target is not allowed

▻ The transition to manufacturing is managed carefully to ensure that the

target cost is indeed achieved
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 Value Engineering
▰ A systematic, structured and function oriented team approach
▰ Evaluates a product's design in order to identify alternatives that will improve
the product's value
▰ Maintains the required standard of quality and reliability at the target cost
▰ Most value engineering (VE) occurs in the product-level and component level
sections of the target costing process
▰ Though a small part of VE occurs during the price-driven costing section

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 Value engineering achieves its assigned target cost
in two ways

I. By identifying improved product designs that reduce component and

manufacturing cost while not sacrificing functionality
II. By eliminating unnecessary functions that increase the product's cost and
complexity

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 History of Value Engineering
▰ In early 1940’s at the time of World War II, It was first was conceived at General Electric Company
▰ Shortages of skilled labor, raw materials, and component parts forced the engineers to find
acceptable substitutes

▰ Lawrence Miles, Jerry Leftow, and Harry Erlicher the engineers at General Electric found VE as
substitute

▰ The engineers noticed VE ensured the continuity of the production process and also frequently
reduced costs, improved the product, or both

▰ VE was used formally in the US Department of Defense in 1961

▰ In 1985,the value engineering process had gained world-wide acceptance
▰ In 1997, Society of American Value Engineers (SAVE) International approved a standard for value
engineering methodology
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 The Organizational Context
▰ At most firms, the team leaders’ function like managers and act with a high degree
of autonomy

▰ Team members are often drawn from every functional area of the firm, including
product design, purchasing, manufacturing, engineering and parts supply

▰ In most firms, the procedure for setting team cost-reduction targets is part of a
hierarchical target-setting process

▰ In companies using a bottom-up approach, team leaders are responsible for

setting their own targets

▰ If a team fails to achieve its target, management takes a series of steps to correct
the problem
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 Planning The Value Engineering Process
▰ The application of value engineering begins with the conceptualization of the
product

▰ It continues through the design process until the product is released to

manufacturing

▰ VE primarily focuses on product functions and only secondarily on cost

▰ The motivating force behind VE is to ensure the product achieves its basic
function that satisfies the customer at an acceptable cost

▰ VE programs are the domain of the product engineer, not the accountant

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 Value engineering techniques
▰ The VE techniques illustrated by Isuzu a Japanese automobile manufacturing
company and widely recognized pioneer in VE methods, can be broken into three
major categories:

▻ The Three Nth-Look VE approaches

▻ Eight teardown approaches

▻ Six other VE approaches

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 Value engineering techniques
▰ The Three Nth-Look VE approaches: The three Nth-look VE approaches are designed
to be applied at different stages of the product design process

I. Zero-look VE is the application of VE principles at the concept proposal stage

and its objective is to introduce new forms of functionality

II. First-look VE focuses on the major elements of the product design and its
objective is to enhance functionality of the product

III. Second-look VE is applied during the last half of the planning stage and the first
half of the development and product preparation stage. The objective of second-
look VE is to improve the value and functionality of existing components, not
create new ones

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 Value engineering techniques
▰ Eight teardown approaches
▻ Isuzu's approach to teardown indicates the firm's large range of cost-reduction
activities
▻ Teardown methods were introduced in 1972, the year after General Motors (GM)
purchased a 37% share of Isuzu
▻ Isuzu uses teardown methods in all stages of product development and to analyze
competitive products
▻ The firm has eight different teardown methods: dynamic, cost, material, static,
process, matrix, unit-kilogram, and group estimate
▻ The first three methods are designed to reduce a vehicle's direct manufacturing cost
▻ The next three are intended to reduce the investment required to produce vehicles
through increased productivity
▻ The last two techniques are an integration of teardown and VE techniques
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 Value engineering techniques
▰ Other VE Techniques
▻ In addition to zero-, first-, and second-look VE and the eight teardown approaches,
Isuzu uses four other cost-reduction techniques.
I. The checklist method is used to identify a product's cost factors and to suggest
ways to reduce costs and guide the firm's cost-reduction activities by
discovering cost-reduction opportunities
II. The firm holds one-day cost-reduction meetings to improve the efficiency of the
entire cost-reduction process, including VE and teardown methods
III. Mini-VE is applied during the development and product preparation stages,
production-sales preparation stage, and the production-sales preparation stage
IV. The VE reliability program is designed to ensure that the most appropriate form
of VE is applied to each problem
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 Component Level Costing
▰ Component level target costing sets the selling prices of the components
manufactured by the firms suppliers and focuses supplier creativity on finding
ways to design component at low cost and uses “Interorganizational Costing’’.

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Steps of Component Level Target Costing
▰ Setting the target cost of major functions.
▻ Historical-cost _reduction based
▻ Market-analysis Based
▰ Setting component level target cost
▻ Functional Analysis
▻ Productivity Analysis
▰ Selecting the supplier for the component.
▰ Rewarding supplier for their creativity

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 Any questions?

THANKS!
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