Life Cycle Costing & Target Costing Flashcards
Key influences on price
- competitors
- costs
- legal/political
- image
- internal/external
- customers/demand
Types of costing
- Cost based
-> ROI - Economists model
-> market based (marginal revenue = marginal cost) - Strategic
-> life cycle - Target costing
Life cycle costing
-> the accumulation of costs for activities that occur over the entire life cycle of a product, from inception to abandonment
Stages in product life cycle
- Product planning and design phase
-> research and development, marketing, production & capacity planning - Product manufacturing and sales phase
-> material costs, production salaries, sales and distribution costs - Post sales service and abandonment phase
-> repairs, warranty costs, product costs, factory closure or redesign cost
Advantages of life cycle costing
-cost visibility is increased
-individual product profitability is better understood
-more accurate feedback info is provided on success or failure of new products
Maximising the return over the product lifecycle
-design costs out of the product (locked in)
-minimise time to market (competitors)
-maximise length of life cycle (more profit)
Company in weak position if
All products are at the same phase of life cycle
-> overcome this by introducing new products that are growing as the old products are dec,inking and by having products with different lengths of life cycle
Life cycle costs
- Development costs
- Design costs
- Manufacturing costs
- Marketing costs
- Distributions costs
Actions to avoid
Rushing to market
Benefit of staggered approach
-> income streams from one market may be used to fund the launch of the product in another market
Target costing
-> a product cost estimate derived by subtracting a desired profit margin from a competitive market price.
Stages in target costing
- Determine the price that customers will be prepared to pay for the product
- Deduct a target profit margin from the target price to determine the target cost
- Estimate the actual cost of the product
- Investigate ways of driving down the actual cost to the target cost
Cost gap can be closed by
-> fewer components
-> shared production platforms
-> training (improve efficiency)
-> automate process
-> remove non-value adding activities
-> cheaper labour/components
Functional analysis
-> is an analysis of the relationships between products functions, their perceived value to the customer and their cost of provision
Value analysis
-> is a systematic interdisciplinary examination of factors affecting the cost of a product or service, in order to devise means of achieving the specified purpose most economically at the required standard of quality and reliability
Value engineering
-> is an activity which helps to design products which meet customer needs at the lowest cost while assuring the required standard of quality and reliability
Target costing characteristics/ benefits
- Market orientated approach (reduce time to market)
- Focus on continual improvement
- Team approach
- Supported by an accurate cost system (cost focus)
- External focus
- Customer focus
Target costing vs lifecycle costing
TC
-pull system
-external market prices
-cost reduction activity
-proactive technique
LCC
-push system
-internal tool
-cost control technique
-reactive technique
Costs that are determined at the design stage
- the number of different components
- whether the components are standard or not
- the ease of changing over tools
- type of pack again
Reduce costs
- Inbound logistics cost. Switch to just-in-time approach (JIT)
- Outbound logistics. Switch to enterprise resource planning
- Marketing and sales cost
