Strategic Tools for Mgt

Accountant
Emerging Applications
Developed Strategic
Cost

Mgt Applications
Activity Based Methods
Target Costing
Capacity Mgt
Asset Mgt
Process Mgt
Extended Enterprise
Lean Enterprise
Theory of Constraints

Enterprise Risk Mgt

Non-financial
Performance
Measurement
Strategy Planning &
Execution
Customer Lifetime Value
Resource Consumption
Accounting

Draft
Strategic Tools for Management
Accounting

Two Approaches to Pricing

1. Cost-Based
Pricing
2. Target Costing
and Pricing

Rs
Rs

Comparing Traditional Cost

Reduction to Target Costing
Under traditional costing, the profit
margin is the result of the difference
between the expected selling price
and the estimated production cost.
Pt = St Ct
The cost-plus method is another
traditional approach.

Comparing Traditional Cost

Reduction to Target Costing
Under the cost-plus method the
selling price is the sum of the
expected product cost and the
expected profit margin.
Scp = Ccp + Pcp

Comparing Traditional Cost

Reduction to Target Costing

Target costing is a method of

determining the cost of a product or
service based on the price (target price)
that customers are willing to pay.
The target cost is the difference
between the target selling price and the
target profit
margin.
Example:
Current product
specifications and the targeted market
share call for a sales price of Rs250,000. The required
Ctc = Stcprofit
is Rs50,000 per unit. The target cost is
Ptc
computed as follows:
Rs250,000 Rs50,000 = Rs200,000

This is also referred to as price-driven costing.

Rationale of Target Costing

In a highly competitive market:
Price is largely determined by supply and demand
Must control costs to earn a profit
Target cost - cost that provides the desired profit on
a product when the seller does not have control over
the products price

Target Costing- Example

Handy
Handy Appliance
Appliance feels
feels there
there is
is aa niche
niche for
for aa hand
hand mixer
mixer
with
with certain
certain features.
features.
Marketing
Marketing Department
Department believes
believes that
that price
price of
of Rs30
Rs30
would
would be
be right
right and
and that
that about
about 40,000
40,000 mixers
mixers could
could be
be
sold.
sold.
Rs2,000,000
Rs2,000,000 invest
invest required
required to
to gear
gear up
up for
for production.
production.
Company
Company requires
requires aa 15
15 percent
percent ROI
ROI on
on invested
invested funds.
funds.
Determine
Determine the
the target
target cost.
cost.

Target Costing

Each functional area within Handy

Appliance would be responsible for
keeping its actual costs within the target
established for that area.

Comparing Traditional Cost

Reduction to Target Costing

Target Cost Concept

Present

Future

Target Costing
Price led
costing
Life-cycle
costs
Focus on
process
design

Crossfunctional
teams
Key
principles
of target
costing

Focus
on the
customer

Value-chain
orientation
Focus on
product
design

Market Share
Objective

Select segment to
compete,
e.g.
luxury or economy
goods
Includes all
product & period
cost to make &
market the product

Product
Functionality

Target Selling Price

Target Profit
Target Cost
Product and Process
Design
NO
Target Cost
Met YES

Market
research
determines
price
at which a new
product will sell.
Customer
willing
to pay (supply &
(Target
S.P-Desired
demand)
Profit )
Management
computes
a manufacturing
cost that
will provide an
acceptable
profit margin
based
on target
Redesign
price
product and
techniques to
achieve target.
(continuous
improvement)

Engineers and cost

analysts design a
product that can be
made for the allowable
cost to make profit when
sold at target price
Produce
(concurrent design &
Profit
engineering)
Target
costing
focuses
a
companys cost reduction
Value engineering used
efforts
in
the
product
Quality of material
design stage of production.
Number of parts
price led
Change
components
Target customer focused
Assign portion of total
Change methods
designed centered and target
costs
to
Costing
cross functional.
marketing,
Model
engineering,
and

TARGET COSTING-CUSTOMER
REQUIREMENTS
UNDERSTANDING CUSTOMER
REQUIREMENTS BY GATHERING MARKET
INFORMATION RELATING TO CUSTOMER
EXPECTATIONS ABOUT:
-PRICE
-QUALITY
-DELIVERY
-SERVICE
-TECHNOLOGY&
PRODUCT PERFORMANCE

Tata motors developed

Nanoits small car with a
target price
Purpose
Price
Product
People
Path
breaking
ideas,
conceived and implemented
in one or more of the 7 Ps,
leading to INNOVATION.

Promotion
Place/Reach
Process

Concerns About Target

Costing
What are some potential problems in
implementing target costing?
1.Conflict can arise between parties
involved in the process.
2.Employees may experience burnout due
to pressure.
3.Development time may increase.
4.Lack of understanding target costing
concept

Target Costing- Case

HCL Provalue details
Production
150000 units
Per Unit Sale Price
10000
Full Cost
1,35,00,00,000 in this
-Manufacturing costs 1,02,00,00,000
-Operating costs
33,00,00,000
Market wants to redesign Provalue and to be sold at much less price.
HCL Expectation
Competitors to lower price by 15%
Respond aggressive above price cut by
20%
-that is from
Rs 10,000 to 8,000 per unit
Price cut leads to annual sales increase by
1,50,000 to 2,00,000 units
Derive Target cost per unit if HCL wants a 10% target operating income
on sales revenue.
How much HCL reduce its unit cost?