Target Costing (II)

Very often the management may decide to go ahead and manufacture a product whose target cost is well below the currently attainable cost (so that there is a cost gap).

To attain the Target cost, management will set benchmarks for improvement towards the target costs, by specified dates.

Options available to reduce costs:

(a) Training staff in more efficient techniques
(b) Using cheaper staff
(c) Acquiring new, more efficient technology
(d) Cutting out non-value-added activities

Cost savings must be actively sought and made continuously. Value analysis will be used to reduce costs if and when targets are missed.

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The following comments appeared in an article in the Financial Times


Mercedes-Benz, one of the world’s most prestigious and tradition-laden carmakers, has taken its time to wake up to the daunting dimensions of the challenges it faces in the rapidly-changing world car market of the 1990s.

The company has accepted that radical changes in the world car market mean that Mercedes-Benz will no longer be able to demand premium prices for its products based on an image of effortless superiority and a content of the ultimate in automotive engineering.

Instead of developing the ultimate car and then charging a correspondingly sky-high price as in the past, Mercedes-Benz is taking the dramatic and radical step of moving to target pricing. It will decide what the customer is willing to pay in a particular product category – priced against its competitors – it will add its profit margin and then the real work will begin to cost every part and component to bring in the vehicle at the target price.



The following extracts are from an article which appeared three months later.


The marketing motto for the Mercedes-Benz compact C-class is that it offers customers more car for their money.

It is the first practical example of a group’s new pricing policy. The range embodies a principle new to Mercedes which states that before any work starts, a new product will be priced according to what the market will bear and what the company considers an acceptable profit. Then each component and manufacturing process will be costed to ensure the final product is delivered at the target price.

Under the old system of building the car, adding up the costs and then fixing a price, the C-class would have been between 15 percent and 20 percent dearer than the 10-year-old outgoing 190 series, Mr Vohnringer said.

Explaining the practical workings of the new system, he explained that project groups for each component and construction process were instructed without exception to increase productivity by between 15 and 25 per cent. And they had to reach their targets in record time.

One result was that development time on the new models was cut to 40 months, about a third less than usual. But the most important effect, according to Mr Vohnringer, has been to reduce the company’s cost disadvantages vis-à-vis Japanese competitors in this class from 35 percent to only 15 percent.

(source: BPP Learning Media)



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