Target

Costing
FURQAN AHMED
(20131-16260)

Definition
Target

Costing is defined as a cost

management tool for reducing the
overall cost of a product over its entire
life-cycle with the help of production,
engineering, research and design.

Formula:
Target cost= Selling price-Desired
profit

Benefits

Delivering the optimal value proposition to end

customers.

Proactive approach to cost management.

Implementationenhances employee awareness

and empowerment.

Minimize non value-added activities.

Reduced time to market.

Negative points
Possible

misuse of the technique.

Producers might make use of cost-based
target costing to squeeze the profit
margins of suppliers, thereby getting
materials at the lowest cost possible.
The stress on the design team of
companies using target costing
Disadvantage to the company.
Product development time might be
lengthen as product is repeatedly
designed to bring cost below that of
target.

Target costing
objectives
To

identify the cost at which the

product must be manufactured if it's
to earn its target profit margin at its
expected or target selling price.

To

decompose the production process

and then to set cost targets for each
product element.

Examples Of Target
Costing:

In 1990 Chrysler Corporation found itself in a very

unhappy financial situation. Profits were down, cash
flow was tight, and the stock was trading at a low price
of $10 per share. Chrysler management decided it was
time to change their approach to new car design. They
adopted a competitive weapon that the Japanese auto
industry had used for many years called target
costing. Target costing was applied to all product
development efforts in the Company including the
NEON, a new small car developed for the lower price
range. The results of using target costing on the NEON
were impressive.

CHRYSLERS RESULTS - 1994

Meets customer requirements for safety and drivability

Neon named Auto of the Year in 1994

CHRYSLERS 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

CHRYSLERS RESULTS 1996

Industry Sales Above Trend

Stock Levels -- Well Positioned for Launch of 1997 Models

Target Costing In
Pakistan:
survey held by Punjab University students

A
on Is
Target Costing implemented in Automobile sector
of Pakistan or not?. The findings of this survey show
only 33% of Pakistani automobile firms uses Target
Costing Technique. The reason of quite low adoption of
this costing technique is that it is perceived as too
complex and costly by the companies in Pakistan. The
target costing is a long term strategy while in Pakistan
the business environment is quite uncertain. The
percentage of adoption can be increased by spreading
the knowledge about the target cost in Pakistan.

Research Findings:

A total 9 responses were received from the 16

automobile companies listed in Karachi stock
exchange.

Only 33 % firms think target costing would be beneficial

for them in future while 66% of firms deny this fact.

The main reason of not adopting the target costing is

that It is not consistent with the nature of business and
44% companies think this method is too complex and it
costs too much.

Automobile companies in Pakistan facing competition

and out of all respondents 55% think that there is
severe competition in the industry.

Other Companies:
Target Costing is widely use in many firms some
of them are as follows
Toyota
Nissan
Ford
Compaq
Dell
IBM
Sony

Target costing
prospective

Target costing which has been widely used by

Japanese firms since 1970s now is spread all
over the world

Main industries: transportation and heavy

equipment industries (Intensive competition,
extensive supply chains, and relatively long
product development cycles)

References:

Reference of Chrysler Corporation.

http://www.csus.edu/indiv/p/pforsichh/accounting
info/121/Ch12%20-%20Target%20Costing/My%20target
%20costing%20handouts.pdf
Reference of Is Target Costing implemented
in Automobile sector of Pakistan or not?
joc.hcc.edu.pk/articlepdf/Shahid%20et%20al
%2032_55.pdf

Reference of other companies.

http://www.imanet.org/docs/defaultsource/thought_leadership/management_control_s
ystems/implementing_target_costing.pdf?sfvrsn=2

Thank you