Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring 2011

Session 4 n Target Costing Analysis n Mid-Term Review

MANAGING COSTS AND REVENUES-2011 Target Costing Analysis n Customer Orientation n Sets costs in the commitment phase- concurrent engineering n Supports keiretsu model via the value chain n Price led costing n Cross functional product teams n Focuses on life cycle costing

MANAGING COSTS AND REVENUES-2011 Target Costing Process n Establishment phase n Market research n Competitor analysis n Niche definition n Customer requirement definition n Product feature definition n Market price determination n Profit rate

MANAGING COSTS AND REVENUES-2011 Target Costing Process n Attainment phase n Cost gap computation n Design costs out n Design release and continuous improvement

MANAGING COSTS AND REVENUES-2011 Cost Reduction n Cost analysis n Components list n Functional analysis n Customer requirement ranking n QFD Matrix n Relative functional rankings n Value engineering n Identify components for cost reduction n Generate cost reduction ideas n Testing and implementation n Cost estimates required at each design iteration

MANAGING COSTS AND REVENUES-2011 Value-Index Analysis n Choose features and options based upon customer preference n Value-Index = Cust. Preference % Feature Cost % n VI > 1…increase spending n VI < 1…decrease spending

MANAGING COSTS AND REVENUES-2011 TC-Strategic Implications n Quality is improved through the customer focus of target costing n Cost reduction is the heart of target costing n Time reduction is a natural by-product due to concurrent engineering

MANAGING COSTS AND REVENUES-2011 TC-Attribute Implications n Technical n Decision relevance improves (quality, cost and time issues are integrated) n Process understanding improves n Behavioral n Early finance involvement and teamwork are mandated n Undesirable attributes of longer development, burnout, feature creep & internal conflict can be managed

MANAGING COSTS AND REVENUES-2011 TC-Attribute Implications, cont. n Cultural n Organizational culture must be prepared n Commitment to sustaining values must be established n Customer focus n Cross-functional cooperation n Open sharing of information