Best Practices in Target Costing

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Target costing is a simple process which does seem rather complicated. In more simple terms it is explained as a tool which is used for cost management. Target costing is implemented as best practice to reduce the overall cost of the product.

Best practices in target costing include:

  • Implementing Target Costing Principles: There are six principles of target costing.

Ø  Price Led Costing: There is a basic formula used to determine the target cost. It involves reduction (subtraction) of the required profit margin from market prices.

Ø  Focus on Customer: Focus on the customers’ requirements for quality, cost and time in making decisions about target cost.

Ø  Focus on Design: The designing process must involve best practices in cost control and time-to-market. Changes in design must be made before the production process begins.

Ø  Cross Functional Involvement: Teams involved in cross functional product and the process must be responsible. They must be actively involved from the beginning to the end of the process.

Ø  Value-Chain Involvement: Members of the chain of production include suppliers, distributors, customers and service providers. All these must be involved in the process of target costing to ensure best practices at various stages.

Ø  Life Cycle Orientation: Both producer and customer must gain benefits of minimizing the total life cycle cost. This involves purchase costing, operating cost, maintenance cost and distribution cost. .

  • Effective Target Costing Process: Companies often come to a point where there is a gap between the target cost and cost projection. This is always in the case of the launch of a new product which may be based on a current design and manufacturing process. It is best practice to close the gap by analyzing the product’s design, raw material required, and manufacturing processes involved. At the same time, maximizing cost saving opportunities is essential.

Teams involved must employ a variety of tools and initiatives to achieve their objectives through best practices.

  • Involving Target Costing Enablers: There are a few things to implement as best practices which include:

Ø  Value Analysis: Analyzing the effective cost to benefits of a new design to the consumer.

Ø  DFMA – Design for Manufacturing Assembly: This means evaluating effectiveness of the new design with regards to the process of assembling the new product.

Ø  Paper Kaizen: This is a term which describes the concept of continuous improvement. It requires setting up of workstations, reviewing assembly steps, and assessing the flow of the process on paper as best practice. This is important for optimizing expenses before they are incurred.

Ø  Hands-on Workshop: There is need to improve material flow and time management as production of new designs continues.

  • Hearing the Voice of Customers: Companies with best practices always listen to the voice of their customers. This helps them manage risks and improve their quality to maintain success by minimizing losses. The price of products must match the quality in order to ensure customer satisfaction as a best practice.
  • Product Development Process: This is a process which companies in compliance with best practices employ. When new designs of specific products are released the new features are analyzed for added benefits to customers. Modifications are made accordingly to achieve the target cost.
  • The Supply Chain: There is need for compliance with best practices in the stages involved from the time of production till the product reaches the supplier. This involves technology, people, activities, information and resources and best practices to manage them.
  • Consistency in Approach: Companies ensuring best practices must ensure consistency in the approach to the entire process of target costing. There must be standard procedures and protocols to make things smoother and free of errors.

Good target costing requires best practices at every stage and helps businesses in achieving cost control and profit enhancement.

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