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 products
life cycle.
 Target Costing Kaizen Costing
What ? A procedural approach to A mandate to reduce costs,
determine maximum allowable increase product quality and/or
cost assuming a given target improve production processes
profit margin through continuous
improvement efforts

Used for? New Products Existing products

When? Development stage (includes Primary production stages
design) (introduction and growth
possibly, but not probably,
maturity)
How? Used to set original production Reductions are integrated into
standards original standards to sustain
improvements and provide new
challenges

Why? Extremely large protential for Limited potential for reducing

cost reduction because 80%- cost of existing products, but
90% of products lifelong costs may provide useful information
are embedded in the product for future target costing efforts
during the design and
development stages
 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: -
[Link] 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