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An approach used to identify the anticipated selling price for product as well as the allowable price for each component
Companies can use Target Pricing to create products that are competitively priced while still maintaining a companys desired profit margin. Target Costing is a part of Target pricing and has many advantages in cost containment and eliminating unneeded costs. It helps make sure that money spent on the product is justified.
The goal of Target costing is: o Design a product following a set cost structure o Cut unnecessary costs o Improve product design
Explore Different Product Design Alternatives Perform Value Engineering / Value Analysis
Production
Part 1 - Analysis o Begin by researching the target market and consumer o Determine a target price that consumers expect o Determine how much profit margin you expect
Example Tata Nano o Tata motors produces passenger cars like Indica and Indigo o Cheapest passenger car in India Maruti Alto starts at Rs. 2.4 lacs. Tata wants to sell a car at Rs. 1 lac i.e. the Nano o Tata wants to earn a 20% margin (approximate) on the Nano o With an target sell price of Rs. 1 lac, a 20% margin, Tata can spend Rs. 80,000 to create a Nano
Explore Different Product Design Alternatives Perform Value Engineering / Value Analysis
Part 2 - Design o Once an overall cost allowance is calculated, determine cost projections for each component within the product o Design the component within the allocated cost budget o Value Engineering / Value Analysis (VE/VA) for each component asks whether the part can be substituted, simplified, or eliminated Example o Component cost reduction at vendor level o Hollow steering column as the engine was on the back of the car o Fixed hatch, trunk is accessible only from inside o No power steering, due to light weight o One windscreen wiper
Production
Part 3 - Implement o Once a final product is design that meets the allocated cost budget production begins o Continue to re-evaluate the product design using VA/VE to continue cost reductions Example o Achieve high volumes to further reduce costs through economies of scale. o Approximately 20 companies supply 70% of the total parts promoting centralization of purchases and cost reduction.
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Volkswagen launched Polo in January 2010 at a base price of 4.3 lacs. After Polos success Volkswagen eyed the mid segment sedan market dominated by Honda City in 2010. Thus, Vento A sedan version of Polo was launched with a base price of 7 lacs. Thus value was added to a 4.3 lack product to make it a 7 lac product ( minus profit margins)
Explore Different Product Design Alternatives Perform Value Engineering / Value Analysis
o o o o
Vento uses metallic grilles and light The third section or boot is well integrated with the body. The engine size was increased from 1.2l to 1.6l in base petrol (trendline) models. Better breaking system, tubeless radials and comfort features in the interiors.
Accounting for Management, Target Costing Approach to Pricing, Apr 8, 2010, http://www.accountingformanagement.com/target_costing_pricing_products_and_services.htm All Business A D&B Company, Managerial implications of target costing Apr 6, 2010, http://www.allbusiness.com/accounting-reporting/methods-standards-cost-accounting/8465191.html Management Accounting Quarterly, Best Practices in Target Costing, Apr 7, 2010, http://www.imanet.org/pdf/1236.pdf ISM, Target Costing Model, Apr 8, 2010, http://images.google.com/imgres?imgurl=http://www.npdsolutions.com/image33.gif&imgrefurl=http://www.npdsolutions.com/target.html&usg=__iiMpHaeUC8MEhTdCrdQLiSX0A8=&h=275&w=361&sz=5&hl=en&start=1&itbs=1&tbnid=8DLY8XciaXc3lM:&tbnh=92&tbnw=121&p rev=/images%3Fq%3Dtarget%2Bcosting%26hl%3Den%26safe%3Dactive%26sa%3DN%26gbv%3D2%26nd sp%3D20%26tbs%3Disch:1
Yasuhiro Monden and Kazuki Hamada, "Target Costing-Kaizen Costing in Japanese Automobile Companies," Journal of Management Accounting Research 3, pp. 16-34.
ET, Tata Nano: Thin margins worry dealers, Jan 12, 2008 http://articles.economictimes.indiatimes.com/2008-01-12/news/27710914_1_tata-nano-tatamotors-dealer-premium-cars