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Life Cycle Costing

Life Cycle Costing.

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Life Cycle Costing

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  1. Life Cycle Costing Product SpecificationTarget PriceTarget ProfitTarget CostMajor Product and Process Design ChangesDoes the designmeet target cost?Estimate LifeCycle CostIs project life cycle cost acceptable?Put product into productionMinor Product and Process Design ChangesProduct Abandonment TargetCosting On-goingimprovement Abandonment STRATEGIC COST MANAGEMENT - BA122B - Fall 2008 Slide 5-1

  2. Product Cost Life Cycle • R & D • Design • Production • Marketing & Distribution • Customer Service Upstream(focus for earlysettlement here) Downstream STRATEGIC COST MANAGEMENT - BA122B - Fall 2008 Slide 5-2

  3. Shift in Strategic Impact • Shift focus from manufacturing costing to… • Upstream or downstream focus using the value chain STRATEGIC COST MANAGEMENT - BA122B - Fall 2008 Slide 5-3

  4. Target Costing • Customer Orientation • Sets costs in the commitment phase-concurrent engineering • Supports keiretsu model via the value chain • Price led costing • Cross functional product teams • Focuses on life cycle costing STRATEGIC COST MANAGEMENT - BA122B - Fall 2008 Slide 5-4

  5. Target Costing Process • Establishment phase • Market research • Competitor analysis • Niche definition • Customer requirement definition • Product feature definition • Market price determination • Profit rate STRATEGIC COST MANAGEMENT - BA122B - Fall 2008 Slide 5-5

  6. Target Costing Process • Attainment phase • Cost gap computation • Design costs out • Design release and continuous improvement STRATEGIC COST MANAGEMENT - BA122B - Fall 2008 Slide 5-6

  7. Cost Reduction • Cost analysis • Components list • Functional analysis • Customer requirement ranking • QFD Matrix • Relative functional rankings • Value engineering • Identify components for cost reduction • Generate cost reduction ideas • Testing and implementation • Cost estimates required at each design iteration STRATEGIC COST MANAGEMENT - BA122B - Fall 2008 Slide 5-7

  8. Value-Index Analysis • Choose features and options based upon customer preference • Value-Index = Cust. Preference % Feature Cost % • VI > 1…increase spending • VI < 1…decrease spending STRATEGIC COST MANAGEMENT - BA122B - Fall 2008 Slide 5-8

  9. TC-Attribute Implications • Technical • Decision relevance improves (quality, cost and time issues are integrated) • Process understanding improves • Behavioral • Early finance involvement and teamwork are mandated • Undesirable attributes of longer development, burnout, feature creep & internal conflict can be managed STRATEGIC COST MANAGEMENT - BA122B - Fall 2008 Slide 5-9

  10. TC-Attribute Implications, cont. • Cultural • Organizational culture must be prepared • Commitment to sustaining values must be established • Customer focus • Cross-functional cooperation • Open sharing of information STRATEGIC COST MANAGEMENT - BA122B - Fall 2008 Slide 5-10

  11. TC-Strategic Implications • Quality is improved through the customer focus of target costing • Cost reduction is the heart of target costing • Time reduction is a natural by-product due to concurrent engineering STRATEGIC COST MANAGEMENT - BA122B - Fall 2008 Slide 5-11

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