Target Costing

1. - = price estimated margin target cost Target Costing • Target Costing (pl. Rachunek kosztów docelowych) • A method of managing new product costs, which, given the market price, allows the company to obtain a required margin • Product and process management which allows for the product to be produced at a cost which will let the company generate an income from a sale at a market price • Target cost • a maximum possible unit product cost, which can be incurred, taking into account the costs that will be incurred during the product life cycle

2. In what way, do we provide value to the customers? What cost can we obtain? Stop What income can we achieve? NO What margin must we achieve? Was the target cost achieved? Can we achieve the target cost? What is the target cost? NO YES YES Production Phases of the target costing

3. Sales Volume = (a) x (b) x (c) x (d) Set the target cost (1) • Possible price that can be achieved • The average price that an enterprise can achieve during the product life cycle, given a specific market share • In order to achieve an average price, the enterprise must estimate the total revenues from sales • The level of future income will depend on the new product concept and market analysis • A-T-RModel (awareness, trial, repeat), factors: • (a)market size • (b)percentage of people aware of the product • (c)percentage of people who will decide to purchase the product • (d)the average number of repeated purchases by persons who decided to try the product

4. Set the target cost (2) • Expected margin • Average margin which is expected on each unit of the new product • Setting of the expected margin • margin as a percent of sales (eg. price = 10 zł, andexpected profitability 20%, so the expected margin = 2 zł • ROI - return on income

5. Set the possible cost that can be achieved • Cost that can be achieved • The average unit product cost, which includes the cost of preparation, production, distribution, after-sale service, and product withdrawal • Future costs are analyzed from the perspectives: • costs of product life cycle • costs of new product value chain

6. Activities which are aimed at achieving the target cost Tools which support an achievement of the target cost: • Value engineering, value analysis (pl. analiza wartości) • Kaizen costing • Strategy of common product platforms

7. Kaizen • Kaizen - Japanese philosophy of management • concentrates on the process of small, gradual, frequent improvements in all areas, no only in an economic sphere, but rather in life as general • a state of organization once achieved can be maintained and even improved, only on a path of gradual and continuous improvement • in the European enterprises Kaizen is often present under the name of CPI - Continuous Improvement Process • Kaizen consists of "process-oriented thinking since before better results are achieved, the process must be improved" • Kaizen is oriented on people and their activities, judges people based on their efforts to improve a process they conduct/supervise • Kaizen is characterized by: • work discipline • time-management • development of team work skills and abilities • development of communication skills

8. Product cost . . Base cost next year Time Kaizen Costing • The process of cost-cutting during production of existing products Base cost in a given year T1 T2