Target Costing

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Article 32

TARGET COSTING FOR NEW-PRODUCT DEVELOPMENT: PRODUCTLEVEL TARGET COSTING 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).

EXECUTIVE SUMMARY
• Product-level target costing works to increase the allowable cost of the product to a level that is both reasonable and achievable given the capabilities of the firm and its suppliers. • Step one establishes the target cost by incorporating the capability of the firm and its suppliers into the allowable cost so that an achievable product-level target cost is established. • Step two uses value engineering to identify ways to design the product so that it can be manufactured at its target cost. • Step three applies the disciplining mechanisms to help ensure that the product-level target cost is achieved.

The target costing process contains three major sections: market-driven costing, product-level target costing, and component-level target costing. In part two of a three part series, this article discusses how product-level target costing works to increase the allowable cost of the product to a level that is both reasonable and achievable given the capabilities of the firm and its suppliers, in a three step process. Step one establishes the target cost by incorporating the capability of the firm and its suppliers into the allowable cost so that an achievable product-level target cost is established. Step two uses value engineering to identify ways to design the product so that it can be manufactured at its target cost. Step three applies the disciplining mechanisms to help ensure that the product-level target cost is achieved.

PRODUCT-LEVEL TARGET COSTING
The objective of product-level target costing is to establish aggressive but achievable product-level target costs. These target costs should place considerable pressure on the firm’s product engineers to find creative ways to reduce the manufacturing costs of the products that they are designing. Target costs differ from allowable costs, because they incorporate the capabilities of the firm and its suppliers into the target costing process. In practice, it is not always possible for the designers to find ways to achieve the allowable cost and still satisfy the firm’s cus1

Product-level target costing can be broken into three steps (see Exhibit 2). In the first step, the product-level target cost is established. This step consists of incorporating the capability of the firm and its suppliers into the allowable cost so that an achievable product-level target cost is established. The second step consists of using value engineering (and other similar techniques) to identify ways to design the product so that it can be manufactured at its target cost. In the third step, the disciplining mechanisms of target costing are applied to help ensure that the product-level target cost is achieved. The disciplining mecha-

Article 32. TARGET COSTING FOR NEW-PRODUCT DEVELOPMENT: PRODUCT-LEVEL TARGET COSTING thereof require that the firm must reduce costs if it is to maintain its desired level of profitability. The degree of cost reduction required to achieve the allowable cost is called the cost-reduction objective and is derived by subtracting the allowable cost from the current product cost: Cost-Reduction Objective = Current Cost–Allowable Cost The current cost is the cost of a new product if it were manufactured today using...
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