{"id":2793,"date":"2009-12-30T15:29:00","date_gmt":"2009-12-30T15:29:00","guid":{"rendered":"https:\/\/www.certitrek.com\/nlpa\/2009\/12\/30\/whitepaper-wednesday-target-costing-best-practices\/"},"modified":"2023-06-22T05:00:24","modified_gmt":"2023-06-22T09:00:24","slug":"whitepaper-wednesday-target-costing-best-practices","status":"publish","type":"post","link":"https:\/\/www.certitrek.com\/nlpa\/blog\/whitepaper-wednesday-target-costing-best-practices\/","title":{"rendered":"Whitepaper Wednesday – Target Costing Best Practices"},"content":{"rendered":"

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. Today, I\u2019ll be reviewing a whitepaper entitled \u201cBest Practices in Target Costing\u201d from the Institute of Management Accountants and BNET.<\/p>\n

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This whitepaper focuses on the authors\u2019 lessons learned from studying the target costing practices of companies that they perceived as leaders in target costing: Boeing, Caterpillar, DaimlerChrysler, and Continental Teves. The first page of the whitepaper introduces the reader to \u201cthe six key principles of target costing\u201d:<\/p>\n

    \n
  1. Price-led costing<\/li>\n
  2. Focus on customers<\/li>\n
  3. Focus on design<\/li>\n
  4. Cross-functional involvement<\/li>\n
  5. Value-chain involvement<\/li>\n
  6. A life cycle orientation<\/li>\n<\/ol>\n

    The description of the first principle succinctly defines and explain target cost: \u201cMarket prices are used to determine allowable\u2014or target\u2014costs. Target costs are calculated using a formula similar to the following: market price \u2013 required profit margin = target cost.\u201d Also noteworthy is the authors\u2019 explanation of what they mean by value-chain involvement: \u201cAll members of the value chain\u2014e.g., suppliers, distributors, service providers, and customers\u2014are included in the target costing process.\u201d<\/p>\n

    A point that is emphasized several times throughout the whitepaper is that if the cost of an innovation or component is greater than the value to the customer of that innovation or component, then that innovation or component should be abandoned. In one of the several good examples used to illustrate the principles taught by the whitepaper, the authors write \u201cOne of Boeing\u2019s customers requested heated floors. Before target costing, The Boeing Company was
    \ninclined to provide almost whatever the customer wanted without regard to cost. The company now prices airplane options separately. When this particular customer learned that the price for heated floors was more than $1 million, it reconsidered its request.\u201d<\/p>\n

    While the whitepaper is not written from a procurement perspective, there are plenty of nuggets that address the procurement role in successful target costing, such as:<\/p>\n