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 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING** LIFE CYCLE COSTS CROSS.

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Presentation on theme: " Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING** LIFE CYCLE COSTS CROSS."— Presentation transcript:

1  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING** LIFE CYCLE COSTS CROSS FUNCTIONAL CUSTOMER FOCUSED PRICE LED DESIGN DRIVEN VALUE CHAIN ** These slides have been developed jointly with CAM-I and include material covered in the book Target Costing: The Next Frontier In Strategic Cost Management By: Shahid Ansari Jan Bell and The CAM-I Target Cost Core Group

2  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... A Case for Action  Global competition with mobile capital  Technology leadership no longer provides lasting competitive edge  Pressure for lower prices  Shorter product life cycles  Demand for custom products

3  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... The new competitive environment  Global competitiveness requires balancing quality, cost, and time Quality Cost Time  Target costing focuses on all three dimensions of the strategic triangle

4  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.  Japanese Companies TARGET COSTING... State of the Art in the U.S.  US Companies  67% use cost plus pricing  Cost estimates need great improvements  Estimate of sales volume provided to suppliers are overstated between 11-25%  No tight monitoring of profits, costs, capital investment, quality, development budget, and performance.  100% used price minus profit  Achieve 80% accuracy of cost estimates at product concept stage  Estimate of sales volume provided to suppliers are within +/-5%  Tight monitoring of profits, costs, capital investment, quality, development budget, and performance.

5  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... What Is It?  A target cost is the allowable amount of cost that can be incurred on a product and still earn the required profit from that product  A strategic profit and cost management process  Price-led  Customer-focused  Design-centered  Cross-functional  Life cycle oriented  Value Chain-based

6  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. PRODUCT CONCEPT DESIGN AND DEVELOPMENT PRODUCTION P R O D U C T D E V E L O P M E N T C Y C L E 0 20 40 60 80 100 Costs Committed Costs Incurred Costs DISTRIBUTION SERVICE DISPOSITION TARGET COSTING... Managing committed costs

7  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.  Target Costing TARGET COSTING... A Different Profit Planning Approach  Cost Plus  Market considerations not part of cost planning.  Costs determine price.  Waste and inefficiency is focus of cost reduction efforts.  Cost reduction is not customer driven.  Cost accountants manage costs.  Suppliers involved after product designed.  Minimizes initial price paid by customer.  Little or no involvement of value chain in cost planning.  Competitive market considerations drive cost planning.  Price determines costs.  Cost reduction is achieved by simultaneous product/process design.  Customer input guides cost reduction.  Cross-functional teams manage costs.  Suppliers involved in concept and design of product.  Minimizes cost of ownership to customer.  Involves the value chain in cost planning.

8  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... In the Product Development Process Market Research Competitive Strategy Competitive Intelligence Product Concept & Feasibility Product Strategy and Profit Plans Product Design & Development Production and Logistics ESTABLISH TARGET COSTS ATTAIN TARGET COSTS VOICE OF THE CUSTOMER EXTENDED ENTERPRISE PARTICIPATION

9  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Setting Target Costs Market Research Competitive Analysis Define Product/ Customer Niche Understand Customer Requirements Define Product Features TARGET COST $ $ $ MARKET PRICE Market Research Competitor Analysis REQUIRED PROFIT

10  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Voice of the Customer  Develop a market-focused mindset –Open-minded, inquisitive, take nothing for granted, share what you learn  Solicit customer information –Panels, focus groups, interviews, surveys  Analyze customer feedback –Profiles, charts, maps, tables  Understand completely what the customer truly values –Features and cost determine value

11  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Listening to the customer?

12  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Price and Profit Margin Multi-year Product and Profit Plan Market Price Required Profit ALLOWABLE TARGET COST Price - Profit  Pricing is dynamic –Collectively consider competitor prices, market share goals, and customer’s acceptable price.  Compute profit over the life of a product –Profit targets may change each year  Target margins must consider firm’s required financial rate of return

13  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Who Participates  Major cross-functional teams –Business Planning Team –Product Team –Design Team –Product Manufacturing Team  Team and functional coordination  Supporting infrastructure

14  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Linear Product Design!

15  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Involving the Value Chain SUPPLIERS TIER TWO SUPPLIERS TIER THREE SUPPLIERS TIER ONE SUPPLIERS CUSTOMERS PRODUCERDISTRIBUTORS SERVICE & SUPPORT RECYCLERS/ DISPOSERS  OPTIMIZING THE SUPPLY CHAIN  Characterize the Supply Chain  Nature and number of suppliers  Distance from the producer  Develop Long Term Relationships  Involve Suppliers in Design  Maintain Margins  EXPECTED CONTRIBUTIONS  Better Focus on Customer Requirements  Provide Input and Ideas Early in the Concept Formation Stage  Eliminate Non-Value Added Activities  Pursue Standardization

16  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Achieving Target Costs Initial Cost Estimate s Perform Value Engineerin g Perform Cost Analysis Design Products/ Processe s Release Design to Productio n COMPUTE COST GAPDESIGN COSTS OUTPRODUCE Compare To Target Cost ACTUAL COST Estimate Achievabl e Cost Undertake Continuous Improvemen t

17  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Information Requirements COMPETITIVE INTELLIGENCE MARKETING DATA COST DATA ENGINEERING DATAPROCUREMENT DATA Information not routinely collected. Existing information not routinely available. TARGET COST INFORMATION

18  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Typical Information Gaps Competitive Intelligence Customer & Marketing Engineering Systems Procurement Competitive Prices and Features Feature/Cost Data Technology Life Cycle Supplier Cost Data Component Interaction VE Case Studies Product Life-cycle Feature/Price Data Attribute/Price Data Attribute/Cost Data Function Cost Data Cost systems Competitor Cost PRODUCT STRATEGY CONCEPT AND FEASIBILITY DESIGN AND DEVELOPMENT PRODUCTION & LOGISTICS Product Development Cycle (When tools are used) Type of Information needed Improvement Ideas Database

19  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Supporting Tools Planning Marketing Engineering Procurement Multiyear Product Plan Value Engineering DTC QFD Supplier Based Value Engineering Supplier Based Value Engineering DFMA, DTC QFD Benchmarking QFD Cost Tables Feature Costing QFD Function Cost Component Cost Process Costing Costing Multiyear Product Plan PRODUCT STRATEGY CONCEPT AND FEASIBILITY DESIGN AND DEVELOPMENT PRODUCTION & LOGISTICS Product Development Cycle (When tools are used) Functional Expertise for Tools Value Analysis

20  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Extending The Domain  Many service industries (e.g. telecommunications) are design driven and can use target costing.  The design philosophy of target costing can be broadly applied to many non- manufacturing situations.  The customer value approach of target costing provides a useful strategic umbrella for ABM and BPR leading to an integrated cost management approach.  Target Costing can be used to address legacy costs through creative redesign.

21  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Does It Work? CHRYSLER’S RESULTS -- 1994  Meets customer requirements for safety and driveability  Neon named “Auto of the Year” in 1994  Short development time (concept to market 31 months)  Below projected development and investment budget  Neon one of few small cars that earns a positive return

22  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Does It Work? CHRYSLER’S 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  Profit margin ratio up from 0.33% to 7.1% in 1995  Chrysler’s Truck Line (including Jeeps and Minivans) number one among US carmakers in “Power Survey.”  Industry benchmark study finds Chrysler the low cost producer in North America for second straight year.  Standard & Poors and Duff & Phelps raised credit ratings - first time since 1974 to “A” level.

23  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Does It Work? CHRYSLER’S RESULTS -- 1996  Industry Sales Above Trend  Stock Levels -- Well Positioned for Launch of 1997 Models  Relatively Stable Incentives  Labor Contract  New Products  Full Wrangler Production  All New Dakota -- Very Well Received By Automotive Press  Jeep Cherokee Update

24  Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999. TARGET COSTING... Critical Success Factors LEADERSHIP POLITICAL  Accommodate legitimate interests  Obtain “buy-in” from major groups  Avoid turf battles BEHAVIORAL  Early functional involvement  Engineering owns costs  Marketing evaluates trades  Targets are commitments  Cross-functional cooperation  Accounting as “business advisor” TECHNICAL/ STRUCTURAL  New data  New tools  Cross-functional teams  New business processes  Revised career paths  Partnerships in value chain  Customer focus  Trust  Open information sharing  Cross-functional teamwork CULTURAL


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