Target Costing For Manufacturing Process And Product Management: A Case Study Analysis

Creating a Team for Design Management

The report is prepared by referring to a case study on a startup company manufacturing bikes of higher quality. Orange mount bikes intend to develop a new braking system to gain competitive advantage. Estimated pricing of bikes have been set by performing competitors analysis and thereby maintaining same functionality and quality level. This bike manufacturing company requires forming a team for managing design of manufacturing process and product. Opinion of team regarding the cost reduction has been evaluated. Furthermore, limitations and benefits of using target costing of newly developed braking system have been demonstrated. 

Requirement i:

The team established by OMB consists of professionals from engineering, marketing, accounting, administration and purchasing. Such team is required for exploring alternatives as a part of design process and contributes in evaluation of products based on primary as well as secondary factors. Development, marketing and project manger team have a proper understanding of requirements of competitive market place. When designing a new braking system, it is essential to establish cost targets and team members would help in establishment of cost target making designs to cost requirements. In order to capture 25% of market share, bikes with new braking system of OMB should be priced at £ 950. For having 10% share of profit, the target cost comes to £ 855. Therefore, it is required to team to make necessary reduction in cost. A sense of commitment to the targeted cost is developed when such product development team develops budgeting. Moreover, team reviews bike design and manufacturing processes for new brake system and they would ascertain any non-value added components and activities for elimination. Team evaluates that labor cost can be reduced by moving one labor to another bike production line (Otley 2016). They have analyzed whether costs can be reduced from manufacturing components. Negotiations in sourcing inputs from suppliers can be done with supplier. All the reasons discussed above depict the requirement of such team for designing manufacturing process and product management.

Requirement ii:

The total cost of manufacturing of new braking design is to be reduced by £ 30. Manufacturing cost of current coat per bike is estimated at £ 760. Targeted manufacturing cost is set at £ 730. Reducing manufacturing cost is very essential for reducing overall cost and generating profit. It is so because manufacturing cost is an important component of total cost and such can be avoided at the initial stage of production. Labor cost can be controlled by reducing number of labor worked and wages paid to them. Therefore, it would be viable to make reduction in manufacturing cost for reducing overall cost. Other non-manufacturing cost that team has agreed to reduce is warranty and support, administration and selling and distribution cost. However, the reduction in warranty and support cost is considered strategy for reducing overall cost because new braking system is reliable. Reducing advertising campaigns will also help in reducing selling and distribution cost (Weygandt et al. 2015). Therefore, it would be viable to make reduction in non-manufacturing cost for reducing overall cost of production. The idea of team for cutting down manufacturing as well as non-manufacturing costs would be viable for achieving targeted cost reduction.

Requirement iii:

Target Costing for Developing Pricing Strategy

The potential areas identified by established teams for reducing cost are manufacturing, administration, warranty, support, selling, and distribution. It can be seen from the table that cost reduction in manufacturing of new braking system is £ 30. Selling and distribution cost per bike in the current period stood at £ 55. Targeted cost in this area is £ 50 thereby reducing cost for selling and distribution of new model by £ 5. Cost of providing warranty and support to customers per bike in the current scenario is £ 35. On other hand, targeted cost reduction for warranty and support is £ 5 that is at £ 30. Cost incurred in administration for current coat per bike is recorded at £ 55. Targeted administrative cost reduction for launching new model is £ 45. Therefore, the cost incurred in administration is to be reduced by £ 10. In the current scenario, the total cost of prediction for new model is estimated at £ 905. On other hand, team members have estimated targeted cost to be at £ 855. This is indicative of the fact that in order to acquire market share and generate profit, there is a need to reduce overall cost for designing new braking system.

Target costing is a method of costing and set of management tool for planning and designing activities for developing product and provides basis for controlling phases of operations and ensuring profitability throughout life cycle of products. It is a method of managing costs by employing a better design and specification process leading overall cost reduction (Van 2016).

Benefits of using target costing for newly developed braking system:

• It is a disciplined approach for realizing and determining total cost by anticipating future selling price and generating desired profitability as the product is produced with specified functionality. Costing and pricing of products are determined from understanding customer willingness to pay and customer needs (Bromwich and Scapens 2016).
• Method of target costing is considered most effective in design and development stage of products. Development of new breaking system can be efficiently done using this particular method of costing. Since target cost is a method of planning, reducing and managing cost, it benefits manufacturing concern in setting their pricing strategy for newly developed product (Malmi 2016).
• The fundamental objective of target costing is to make money from selling product set at reasonable price, growing, reinvesting and increasing value. Understanding of competitive scenario and marketing conditions is emphasized under this method. Requirement of customers is focused in this approach in terms of function, quality, price and delivery (Lavia and Hiebl 2014). Trade off across the organization regarding the pricing is addressed and establishes them in early stage of development cycle.
• Target costing make use of management control system for reinforcing and supporting strategies of manufacturing. For designing right product, this particular method of costing integrates requirement of suppliers with that of supplier activities. Organizations while designing new product and using target method costing would be able to ascertain market opportunities that helps in fixing possible target selling price and meeting the objectives of profit generation. Moreover, organization can also achieve competitive advantages as it has the scope of product innovation.

Limitations of using target costing for newly developed braking system:

• There is likelihood that there can be omission of essential costs under method of target costing as it has the fundamental objective of controlling costs (Hopper and Bui 2016). Moreover, accuracy of workings under target cost is difficult.
• Target costing can lead to under or over costing of products as the cost incurred in manufacturing products can be different (Wouters and Kirchberger 2015). However, this over and under costing can be eliminated if organization has mechanism for collecting actual cost of products and comparing them with targeted costs.  
• Development process of product can be lengthened to a significant extent because for designing sufficient low cost products would require a number of design iterations that would help in meeting margin criteria and target cost. This is commonly witnessed when project manager is not able to pull the plug on designing of product.
• An organization can experience several finger pointing because target-costing approach results in deductions of large amount of mandatory costs. For instance, if it were required to make alteration in production layout for generation of cost savings, industrial staffs would not be happy (Eldenburg et al.2016). On other hand, purchase staffs would not be required to make negotiations in costs for reducing costs. In order to address this problem, it would be required for industrial staffs to have strong negotiations and interpersonal skills.
• Target costing depicts that it is a traditional concept of lump sum arrangement and mainly focuses on saving costs rather than inflating the target (Edmonds et al. 2016). Total alignment is essential for taking benefits of target costing, as it is a key to the application of this particular approach. However, it is difficult to have such alignment in organizational process. There should be one team having one goal using one approach.

Conclusion:

From the analysis of case of Orange mount bikes, it can be inferred that for generating profits by launching new braking system requires reducing the cost to targeted estimates. Concerning this, it would be suitable for organization to employ the target costing method for developing pricing strategy of new model of bikes. However, there are several advantages and disadvantages of target costing. It would be required by bike manufacturers to have joint management that have shared objectives and are best for delivering solutions on new product development project. Nevertheless, OMB would be able to continue concentrate on saving money and attaining cost certainty. Pooled knowledge, resources, and generation of innovative thinking from team would help in development of new braking system.

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