3. Target costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum target cost figure. The target cost for a product is calculated by starting with the product's anticipated selling price and then deducting the desired profit. TARGET COST = ANTICIPATED SELLING PRICE – DESIRED PROFIT

5. Value engineering is used in target costing to reduce product cost by analyzing the tradeoffs between different types of product functionality and total product cost. An important first step in value engineering is to perform a consumer analysis during the design stage of the new or revised product. TARGET COSTING

6. The type of value engineering used depends on the product's functionality. GROUP 1 Changes are made to features. Frequent new models or updates to the product. E.g. automobiles, computer software, cameras audio/video equipment. GROUP 2 Changes are made to product. Functionality must be designed into the product. E.g.construction equipment(truck), specialized medical equipment

7. Functional analysis a process of examining the performance and cost of each major function or feature of the product. Objective: An overall desired level of performance achievement for each function is obtained while keeping the cost of all functions below the target cost. Benchmarking is often used at this step to determine which features give the firm a competitive advantage.

8. Design analysis - The design team prepares several possible designs of the product each having similar features with different levels of performance and different costs. Benchmarking and value chain analysis help guide the design team in preparing designs that are both low cost and competitive. The design team works with cost management personnel to select the one design that best meets customer preferences while not exceeding the target cost.

10. Group technology is a method of identifying similarities in the parts of products a firm manufactures so the same parts can be used in two or more products thereby reducing costs. Large manufacturers of diverse product lines e.g. automobile industry, use group technology in this way. ABC is particularly useful for helping product designers purchasing managers manufacturing managers and marketing managers work together with a common understanding of the costs of different features and options.

11. Target costing was developed in recognition of two important characteristics of markets and costs. MARKETS: Companies have less control over price than they would like to think. The market (i.e., supply and demand) determines prices. So, anticipated market price is taken in target costing.

12. COST: Most of the cost of a product is determined in the design stage (not during production). The opportunities to reduce cost come from designing the product so that it is Simple to make, Uses inexpensive parts, and Is robust and reliable. The difference between target costing and other approaches to product development is profound. Instead of designing the product and then finding out how much it costs, the target cost is set first and then the product is designed so that the target cost is attained. TARGET COSTING

13. Handy Appliance Co. feels that there is a market niche for a hand mixer with certain new features. The marketing department believes that a price of $30 would be about right for the new mixer. At that price, it is estimated that 40,000 of new mixers could be sold annually. An investment of $2,000,000 would be required to design, develop, and produce. The company desires a 15% return on investment (ROI).

14. Projected sales (40,000 mixers*$30 per mixer ) $1,200,000 Less desired profit (15%*$2,000,000) $300,000 Target cost for 40,000 mixers$9,00,000 Target cost per mixer ($9,00,000 / 40,000 mixers) $22.50 Given these data, the target cost to manufacture, sell, distribute, and service one mixer is $22.50 as calculated hereafter

15. Health Products International Inc. (HPI) is conducting a value engineering project by making a target costing analysis of a major product - a hearing aid. Second-generation hearing aid (HPI – 2) for $ 750 (cost of $ 650) Has obtained 30 percent of this market worldwide at a profit of $100 per aid. Competitor recently introduced a new third generation hearing aid @ the price to $1200. HPI must meet the new lower price and maintain its current rate of profit ($100 per unit) by redesigning the hearing aid and/or the manufacturing process.

16. The target cost for the new aid is A reduction in cost of $150 ($650-$500) from the current model.

17. ALTERNATIVES Alternative A (-)Reduce R&D: $50 Replace – (-) The microphone unit with one of nearly equivalent sensitivity: $30 (-)Toggle power switch with slide switch: $30 (-)Current inspection procedure with an integrated quality review process at each assemble station: $40 Alternative B Replace – (-)Amplifier unit with one having slightly less power, not expected to be a noticeable difference:$ 50 (-) Microphone unit: $30 (-) Toggle power switch with slide switch: $ 30 (-) Current inspection procedure : $ 40 Alternative C (+)Increase R&D to 3G: $40 Replace – (-)Amplifier unit: : $ 50 (-)Microphone unit: $30 (-)Toggle power switch with slide switch: $ 30 (-)Current inspection procedure : $ 40 (-)Plastic earpiece material with material of lower quality: $20 (-)Renegotiate contract with supplier of plastic casing:$ 20 $150

18. The U.S. Auto Companies – General Motors, Ford, and Daimler Chrysler The Japanese Auto Companies - Toyota, Nissan, Honda, Mitsubishi etc. General Electric Motorola NASA Sony The U.S. Military

19. Provide for the members of the design team a running series of cost estimates based on Initial design sketch, Activities based costing reviews of production process, and Best guess costing information from suppliers based on estimated production volumes. Take responsibility for any capital budgeting requests generated by the design team. Answer to any questions from finance staff regarding issues or uncertainties in the capital budgeting approach. Bridging the gap between the current cost of product development and design and the target cost.

20. Proactive approach to cost management. Orients organizations towards customers. Breaks down barriers between departments. Minimize non value-added activities. Reduced time to market. Encourages selection of lowest cost value added activities. Implementation enhances employee awareness and Foster partnerships with suppliers.

21. Requires many meetings for coordination. Its implementation requires willingness to cooperate. Effective implementation and use requires the development of detailed cost data. May reduce the quality of products due to the use of cheep components which may be of inferior quality.

22. Author(s): Marilyn M. Helms, Lawrence P. Ettkin, Joe T. Baxter, and Matthew W. Gordon

23. Target costing may serve as a solution when developing new products, minimizing costs through the optimal use of all resources along the entire supply chain. Originating in Japan, target costing is used in over 80 percent of Japanese assembly companies (Kroli, 1997) and by 100 percent of Japanese car manufacturers (Boer and Ettiie, 1999). Target costing involves :

26. Lack of Understanding or Relevance Team and Cross- Functional Barriers Irrelevance or Fear of the Effects Production Detail MIS and Accounting Cost Data Limitations

27. Research at the University of Birmingham (UK) found that if the design team has difficulty meeting a target cost, a systematic approach can be taken. First, it may be important to review the target cost to determine if the cost can be raised or if margins can be reduced. The next step is to review the manufacturing process for a possible modification or relaxation of product functionality requirements. It may be useful to make improvements in the machinery tooling to meet target costs. Another avenue is to reduce supplier costs. The last alterative may be abandoning the project.