Target Costing

3984 Words Dec 19th, 2010 16 Pages
Article 32

Robin Cooper and Regine Slagmulder
Editors’ Note: This article is an updated synthesis of in-depth explorations contained in Target Costing and Value Engineering, by Robin Cooper and Regine Slagmulder (Portland, Oregon: Productivity Press, 1997). Part two of the series discusses product-level target costing; part three, to be featured in an upcoming issue, will address component-level target costing. tomers. Consequently, the objective of product-level target costing is to increase the allowable cost of the product to a level that can reasonably be expected to be achievable, given the capabilities of the firm and its suppliers (see Exhibit 1).
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For the current cost to be meaningful, the components used in its estimation must be very similar to those that eventually will be used in the new product. If the existing model uses a 1.8-liter engine and the new model uses a 2.0-liter one, for example, current cost would be estimated using the cost of the most similar 2.0-liter engine currently produced by the firm. Because the allowable cost is derived from external conditions without consideration of the firm’s internal design and production capabilities, there is a risk that the allowable cost will not be achievable. In this case, to maintain the discipline of target costing, the firm must identify the achievable and unachievable parts of the cost-reduction objective. Analyzing the ability of the product designers and suppliers to remove costs from the product (see Exhibit 3) derives the achievable or target cost-reduction objective. The process by which costs are removed from the product is called value engineering, and it depends heavily on an interactive relationship with the suppliers. The purpose of this relationship is to allow the suppliers to provide early estimates of the selling prices of their products and, when possible, insights into alternative design possibilities that would enable the firm to deliver the desired level of functionality and quality at reduced cost. The unachievable part of the cost-reduction objective (referred to in Exhibit 2) is called the strategic

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