Managing Costs & Revenues

1. Managing Costs & Revenues Professor William F. O’Brien, MBA, CPA Spring2012

2. Session 6 • Target Costing Analysis • Baldwin Case MANAGING COSTS AND REVENUES-2012

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 MANAGING COSTS AND REVENUES-2012

4. Target Costing Process • Establishment phase • Market research • Competitor analysis • Niche definition • Customer requirement definition • Product feature definition • Market price determination • Profit rate MANAGING COSTS AND REVENUES-2012

5. Target Costing Process • Attainment phase • Cost gap computation • Design costs out • Design release and continuous improvement MANAGING COSTS AND REVENUES-2012

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 MANAGING COSTS AND REVENUES-2012

7. Value-Index Analysis • Choose features and options based upon customer preference • Value-Index = Cust. Preference % Feature Cost % • VI > 1…increase spending • VI < 1…decrease spending MANAGING COSTS AND REVENUES-2012

8. 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 MANAGING COSTS AND REVENUES-2012

9. 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 MANAGING COSTS AND REVENUES-2012

10. 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 MANAGING COSTS AND REVENUES-2012