Target Costing

 ‘It is a system where in the cost of the final product is

fixed before manufacturing the product.
 Target Costing

 ‘It is a system where in the cost of the final product is

fixed before manufacturing the product.
 Target costing is the process of determining the
maximum allowable cost for a new product and then
developing a prototype that can be made for that
maximum target cost figure.
 Target cost = Anticipated selling price – Desired profit
 The market ( i.e., supply and demand) determines
price.
 Most of the cost of a product is determined in the
design stage.
 Decisions made at the design stage, which can affect
the cost of a product
 The features of the product.
 How to avoid ‘over design’.
 The number of components needed.
 Whether the components are standard or specialised.
 The complexity of machining and construction.
 Where the product can be made.
 What to make in-house and what to sub-contract.
 The quality of the product.
 The batch size in which the product can be made.
 Kaizen Costing
 The word kaizen is a Japanese word meaning
continuous improvement.

 ‘Kaizen costing is based on the belief that nothing is

ever perfect, so improvements and reductions in the
variable costs are always possible’
 Kaizen Costing

 The method can be defined as a focus on obtaining

small, incremental cost reductions (rather than big
changes at longer intervals) during the production
phase of the product’s life cycle.
 Target Costing
What ? A procedural approach to determine
maximum allowable cost assuming a
given target profit margin
Used for? New Products
When? Development stage (includes design)
How? Used to set original production
standards
Why? Extremely large protential for cost
reduction because 80%-90% of
product’s lifelong costs are embedded
in the product during the design and
development stages
Kaizen Costing
A mandate to reduce costs, increase
product quality and/or improve
production processes through
continuous improvement efforts
Existing products
Primary production stages (introduction
and growth possibly, but not probably,
maturity)
Reductions are integrated into original
standards to sustain improvements and
provide new challenges
Limited potential for reducing cost of
existing products, but may provide
useful information for future target
costing efforts
 Lifecycle costing
 To make profit on a product it is essential that the total
revenue arising from the product exceeds total costs,
whether these costs are incurred before, during or after
the product is produced. This is the concept of life cycle
costing.
Phase Examples of types of cost

Design Research, development, design and tooling

Manufacture Material, labour, overheads, machine set up,

inventory, training, production machine
maintenance and depreciation

Operation Distribution, advertising and warranty claims

End of life Environmental clean-up, disposal and

decommissioning
 Activity Based Costing

 Activity Based Costing (ABC) is a superior alternative

to Traditional Costing methods.
 accurate knowledge of product cost is essential for
right pricing decision
 Incorrect apportionment of indirect costs/overheads
leads to distorted cost picture and wrong pricing
 Activity Based Costing

 ABC attempts to accurately identify the product or

group responsible for each expense and allocate it to
same rather than arbitrarily apportioning all costs on
random basis.
 Activity is a process that consumes resources (and
therefore costs money) and adds value to the product
.
 Activity involves cost and Value
 Activity Based Costing
In ABC application, following questions are
addressed: -
1. What activities are being performed by the
organization?
2. Why does organization need to perform
those activities?
3. How much of each activity is required by each
of the products, services and customers?
4. How much does it cost to perform each of
those organizational activities?
 Classification of Activities

(1) Unit Level Activities

(2) Batch Level Activities
(3) Product Level Activities
(4) Facility Level Activities
 Unit Level Activities

 Unit Level Activities are those activities which are

performed each time a single product or unit is
produced.
 Batch Level Activity

 These activities which are performed each time a

batch of products or group of identical products are
produced

 Machine setups, inspections, production scheduling,

materials handling are examples of batch level
activities
 Product Level Activities

 These activities which are performed to support the

production of each different type of product
 Eg: Maintenance of equipment, engineering charges
 Facility Level Activities

 Facility Level Activities are those which are needed to

sustain a factory's general manufacturing process.

 These activities are common to a variety of products

and are most difficult to link to product specific
activities.
 Factory management, maintenance, plant
depreciation are the few examples of facility level
activities.
 Responsibility Accounting

 An accounting system that collects, summarizes, and

reports accounting data relating to the
responsibilities of individual managers.
 Responsibility Accounting

 an accounting system which tracks and reports costs,,

revenues, and operational statistics by area of
responsibility or organizational unit.
 To implement a responsibility accounting system, the
business must be organized so that responsibility is
assignable to individual managers
 only those items over which a manager has direct
control are included in the responsibility report for
that management level.
 RESPONSIBILITY CENTERS

A Segment
 is a fairly autonomous unit or division of a company
defined according to function or product line.
function: marketing, production, finance, etc.
product line: electrical products, food division.
 A Responsibility Center.

 is a segment of an organization for which a

particular executive is responsible
There are three types of responsibility centers
(1) expense (or cost) center.
(2) Revenue Center
(3) profit center.
(4) Investment center
 expense (or cost) center

 a responsibility center incurring only expense (cost)

items and producing no direct revenue from the sale
of goods or services.
 the appropriate goal of an expense center is the long-
run minimization of expenses
 Revenue Centers

 managers are held responsible for revenues (sales)

only. –
 Managers of such centers also responsible for
controlling expenses of unit as well
 Profit Centers

 a responsibility center having both revenues and

expenses.
 Investment Centers

 a responsibility center having revenues, expenses,

and an appropriate investment base