Managing Costs & Revenues

1. Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring 2010

2. Session 4 Target Costing Analysis Mid-Term Review

3. Target Costing Analysis • Customer Orientation • Sets costs in the commitment phase-concurrent engineering • Supports keiretsu model via the value chain • Price led costing • Cross functional product teams • Focuses on life cycle costing

4. Target Costing Process • Establishment phase • Market research • Competitor analysis • Niche definition • Customer requirement definition • Product feature definition • Market price determination • Profit rate

5. Target Costing Process • Attainment phase • Cost gap computation • Design costs out • Design release and continuous improvement

6. Cost Reduction • Cost analysis • Components list • Functional analysis • Customer requirement ranking • QFD Matrix • Relative functional rankings • Value engineering • Identify components for cost reduction • Generate cost reduction ideas • Testing and implementation • Cost estimates required at each design iteration

7. TC-Strategic Implications • Quality is improved through the customer focus of target costing • Cost reduction is the heart of target costing • Time reduction is a natural by-product due to concurrent engineering

8. TC-Attribute Implications • Technical • Decision relevance improves (quality, cost and time issues are integrated) • Process understanding improves • Behavioral • Early finance involvement and teamwork are mandated • Undesirable attributes of longer development, burnout, feature creep & internal conflict can be managed

9. TC-Attribute Implications, cont. • Cultural • Organizational culture must be prepared • Commitment to sustaining values must be established • Customer focus • Cross-functional cooperation • Open sharing of information