Target & Life Cycle Costing

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Transcript of Target & Life Cycle Costing

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ACKNOWLEDGMENT:-

We would like to express our greatest gratitude to the people who have helped & supported us throughout the project. We are grateful to our teacher Prof. Paarmjeet Kaur for her continuous support for the project, from initial advice & contacts in the early stages of

conceptual inception & through ongoing advice & encouragement to this day.

A special thank of mine goes to Company officials who helped us in completing the project & exchanged their interesting ideas, thoughts & made this project easy and accurate.

Regards

Gursimran SinghHarsimran SinghKaran SudhendranKarminder KaurRahul Sharma

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Table of contents

Abstract.........................................................................................................................................................2

1.Target Costing...........................................................................................................................................2

1.1Defination ...........................................................................................................................................3

1.2History and evolution of target costing.............................................................................................6

1.3How target costing is processed.........................................................................................................6

1.4Limitations...........................................................................................................................................7

1.5Target Costing:Innovative technique of cost accounting................................................................8

2.Life Cycle Costing...................................................................................................................................12

2Introduction .........................................................................................................................................12

2.1Definations.........................................................................................................................................18

2.2Brief history of LCC analysis...........................................................................................................19

2.3Why use LCC:...................................................................................................................................20

2.4Procedure:.........................................................................................................................................20

2.5Importance of LCC in this era.........................................................................................................20

2.6Limitations of LCC:..........................................................................................................................20

3.Analysis of Implementation of Target Costing at MILKFED............................................................25

4.Analysis of Implementation of Target and Life-cycle costing at Sarovar Hotels and Resorts........29

5.Analysis of Implementation of Target and Life-Cycle Costing at HMT...........................................33

6.Analysis of implementation of Life-cycle costing at Spice digital Ltd .............................................39

7.Analysis of Implementation of Target and Life-Cycle Costing at AVON cycles………………. 44

8. Analysis of Implementation of Target Costing at ………………. 44

8.References................................................................................................................................................38

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Abstract

Traditional cost-based pricing which became the dominant approach to pricing during the

period when products were long-lived and there was relatively little competition. However, in

today’s competitive environment, cost-based prices may not be competitive, as worldwide

competition places intense downward pressure on prices and removes slack from pricing

formulas. Furthermore, due to these competitive pressures, the lifecycle of products and the

time to bring new products to the market have reduced. Companies nowadays are indulging

in two main aspects in order to control cost of their products so as to have a competitive edge

in the market: Target Costing and Product Life Cycle Costing. Target Costing is the process

of determining the maximum allowable cost for a new product and then developing a

prototype that can be profitably made for that maximum target cost. Lifecycle Costing

analysis is done to quantify the total cost of ownership of a product or a project throughout its

full lifecycle, which includes research and development, construction, operation and

maintenance, and disposal. Life Cycle Costing is a concept used for making decisions

between alternative options, optimizing design, scheduling maintenance and revamping

project planning.

We divided ourselves into two teams. One team took care of Lifecycle Costing analysis and

the second team was analyzing Target Costing.

The Target costing team selected the following companies for their analysis:-

1) Verka milk plant

2) Sarovar Hotels and Resorts

3) Hindustan Machine Tools

The Lifecycle costing team selected the following companies for their analysis:-

1) Spice Digital Limited

2) AVON CYCLE

Questions pertaining to the concept, evolution, reasons and methods for implementation,

advantages and disadvantages were asked from the above companies. Most of the companies

were also willing to share data with the team members which added clarity to the subject.

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Based on their responses our team was able to complete successful analysis of both Target

and Lifecycle Costing.

(1) Target Costing

1.1 Definition:

Target Costing can be defined as ‘a structured approach to determining the cost at which a proposed product with specified functionality and quality must be produced, to generate a desired level of profitability at its anticipated selling price’. Basically Target Costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum target cost figure. The term “Target Costing” is a misnomer: it is not a product costing system, but rather a management technique aimed at reducing a product’s life-cycle costs. Rather it is much more than a management accounting technique. It is an important part of a comprehensive management process aimed at helping an organization to survive in an increasingly competitive environment. By describing costs in a proactive and future-oriented manner, managers can determine how they should alter product designs before they enter the manufacturing process in order to ensure that the company earns a reasonable profit on all new products.

In price-based target costing, a company sets a target cost through comparison of competitive products. They gather data on the market price and subtract their desired profit margin. This desired profit margin will almost always greater than the cost of capital but is influenced by macro environmental forces as well as shareholder goals. When the product being developed does not meet the target cost and profit, often it is not commercialized. While it may be important as a tool to those competing on delivery speed, quality, product flexibility, or delivery reliability, the target costing technique is more useful to those manufacturers who mass produce a make-to-stock item in a competitive market in which customers are most sensitive to price and cost levels.

A number of companies, primarily in Japan, use target costing including Compaq, Cummins Engine, Daihatsu Motors, DaimlerChrysler, Ford, Isuzu Motors, ITT, NEC, Toyota etc.

Target Costing for a product is calculated by starting with the product’s anticipated selling price and then deducting the desired profit.

Target Cost = Anticipated Selling Price – Desired Profit

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1.2 History and Evolution of Target Costing:

A retrograde approach for determining product costs, which is one of the most important features of target costing, can be found as early as the beginning of the last century at Ford in the United States and in the development of the Volkswagen Beetle in Germany in the 1930s. At Volkswagen, in order to meet the price goal of DM 990, alternative technical solutions were weighed on the basis of cost considerations . Yet a full-fledged target costing approach began during the period of scarce resources after World War II. During this time, Americans created a concept of maximizing desirable product attributes while at the same time minimizing product costs . The technique became known as “value engineering” and was subsequently adopted by Japanese companies in order to withstand stiff competition within Japan. In the 1960s, value engineering was combined with the idea of influencing and reducing product costs as early as possible during the planning and development stages of a product. Target Costing emerged in Japan in 1960s as a response to difficult market conditions. A proliferation of consumer and industrial product of western firms were overcrowding the markets in Asia. Also, Japanese companies were experiencing shortages of resources and skills needed for the development of new concepts, tools and techniques, which were required to achieve parity with the toughest western competitor in terms of quality, cost and productivity.Many Japanese companies considered modified cross-functional activities, as used by Western firms for manufacturing and achieving effective results. They believed that there were advantages in combining employees from strategy, planning, marketing, engineering, finance and production into expert teams. These terms were able to examine new methods and techniques for the design and development of new products, and aimed at enhancing the degree of integration between the upstream and downstream activities of a firm’s operations. Target costing thus emerged from this environment. A range of specialized tools, including functional analysis, value engineering, value analysis and concurrent engineering were introduced to support target costing. This made Japanese companies particularly effective in the areas of product design and development, where they were able to identify all relevant elements to formulate a holistic management approach, in order to achieve performance levels to meet the firm’s objectives.

The first use of value engineering in Japan—known as “genka kikaku”—occurred at Toyota in 1963. Later “genka kikaku” was translated into “target costing,” the term now used throughout the world. Rösler (1996) did etymological research to clarify the derivation of the term “target costing” from Japanese language, which he described as

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原 價 企 劃Gen ka Ki kaku

Origin Price Plan

Cost

Target Costing

Even though Kato (1993) criticizes the use of “target costing” as a translation of “genka kikaku,” the term has been generally accepted in the Western world. At the annual meeting of the Japan Cost Society in 1995, the official name was made “target cost management” on the grounds that “target costing” was too vague and did not convey the true meaning of “genka kikaku.”Even though the basic concept of target costing has been in existence in Japan for more than 40 years, its application has evolved rather slowly as many companies responded to changes in the external environment. As competition grew fiercer and profits weakened, the use of target costing intensified and companies developed better methodologies. Until the early 1990s, many companies in Japan were using target costing effectively, though their applications of it were limited to relatively few products and parts. Target costing was also largely dependent on experience and intuition rather than on scientific and objective information. In other cases, target costing was initiated by purchasing departments as a tool to manage suppliers, so it never extended into other areas of the company. It was also common to implement only some components of target costing rather than a fully integrated system. However, as different autonomous activities were being integrated into target costing, the approach slowly evolved into a far more powerful system (Buggert and Wielpütz, 1995).In the early of 1990s, three major events occurred in Japan that contributed to significant changes in target costing. The first and most significant event was the bursting of the economic bubble in 1990 and 1991, which caused many companies to struggle to meet customers’ expectations of lower prices. Existing target costing practices made it difficult to eliminate extra cost. At the same time, in an effort to survive, the strategic focus of major Japanese companies shifted from increasing market share to earning profit. More integrated, companywide efforts to reduce costs resulted, with efforts focused mainly on expanding the existing target costing systems.

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The second event was the rise of the Japanese yen against the U.S. dollar, which started in 1993. By 1995, the Japanese yen had appreciated as much as 50 percent against the dollar. It moved from a stabilized exchange rate of 130–140 yen per dollar in 1992 up to a record 84 yen per dollar. As a result, both exports and the profit margins of Japanese companies plummeted. To survive, Japanese companies intensified their use of target costing.

The long recession in Japan caused by a crisis in the financial sector was the third major event that forced many Japanese companies to squeeze out costs to meet their profitability requirements. This time the improvement focused largely on information processing and information technology support.

Clearly, target costing has evolved from a relatively simple instrument for controlling the cost of purchases to a comprehensive profit management instrument (Hasegawa, 1994). Its goal is now generally understood to be to minimize life-cycle costs so that long-term profit is maximized.

1.3 How Target Costing is processed:

The process of target costing involves following set of activities

The first part of the process is driven by customer, market and profitability considerations. Given the profitability is critical for survival, a target profit margin is established for all new product offerings. The target profit margin is derived from the company’s long-term business

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1 Market Research:Determine Customer wants and Price Sensitivity

2 Planned Selling Price is set

3 Target Cost is determined as:Selling Price-Desired Profits

4 Teams of Employees from Various Areas and Trusted Vendors Simultaneously

5 Design Product Determine Manufacturing Determine necessary Process Raw Materials

6 Manufacturing: Once target Cost is achieved the manufacturing begins.

7 Continous Cost Reduction

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plan, which incorporates its long-term strategic intent and profit margins. Each product or product line is required to earn at least the target profit margin.

Then for any given product, a target selling price is determined using various sales forecasting techniques. Critical to setting the target selling price are the design specifications (reflecting certain levels of functionality and quality) of the new product. These specifications are based on customer requirements and expectations and are often influenced by the offerings of competitors. Importantly, while setting the target selling price, competitive conditions and customers’ demands for increased functionality and higher quality, without significant increases in price, are clearly recognized, as charging a price premium may not be sustainable. Hence, the target selling price is market-driven and should encompass a realistic reflection of the competitive environment.

Integral to setting the Target selling price is the establishment of target production volumes, given the relationship between price and volume. The expected targets volumes are also critical to computing unit costs, especially with respect to capacity related costs (such as tooling costs), as product costs are dependent upon the production levels over the life cycle of the production. Once the target selling price and required profit margin have been determined, the difference between these two figures indicates the allowable cost for the product. Ideally, the allowable cost becomes the target cost for the product. However, in many cases the target cost agreed upon will exceed the allowable cost, given the realities with existing capacities and capabilities.

The next stage of the target costing process is to determine cost reduction targets. Some firms will do this by estimating the “current cost” of the new product. The current cost is based on existing technologies and components, but encompasses the functionalities and quality requirements of the new product. The difference between the current cost and the target cost indicates the required cost reduction that is needed. This amount may be divided into a target cost-reduction objective and a strategic cost-reduction challenge. The former is viewed as being achievable (yet still a very challenging target), while the latter acknowledges current inherent limitations. After analyzing the cost reduction objective, a product-level target cost is set which is the difference between the current cost and the target cost-reduction objective.

It should be noted that a fair degree of judgment is needed where the allowable cost and the target cost differ. As the ideal is to produce at the allowable cost, it is important that the difference is not too great. Once the product-level target cost is set, however, it generally cannot be changed, and the challenge or those involved is to meet this target.

Having achieved consensus about the product-level target cost, a series of intense activities commence to translate the cost challenge into reality. These activities continue throughout the design stage up until the point when the new product goes into production. Typically, the total target is broken down into its various components, each component is studied and opportunities for cost reductions are identified. These activities are often refer to as value engineering (VE) and value analysis (VA). Value engineering involves searching for opportunities to modify the design of each component or part of a product to reduce cost, but

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without reducing functionality or quality of the product. Value analysis entails studying the activities that are involved in producing the product to detect non-value-adding activities that may be eliminated or minimized to save costs, but without reducing the functionality or quality of the product. Where components are sourced from suppliers (which is often the case in the automotive industry), target prices are established for each part and the company’s employees work with the suppliers to ensure that the targets are achieved. Overall, the aim of the process is to ensure that when production commences, the total cost will meet the target, and profit goals will be achieved. There is also an ongoing continuous improvement program, known as Kaizen costing, that focuses on the reduction of waste in the production process, thereby further lowering costs below the initial targets specified during the design phase.

1.4 Limitations:

Target Costing has a number of limitations and implementation challenges. These include:

1. Lengthening of Development Process:

The development process can be lengthened to a considerable extent since the design team may require a number of design iterations before it can devise a sufficiently low-cost product that meets the target cost and margin criteria. This occurrence is most common when the project manager is unwilling to “pull the plug” on a design project that cannot meet its costing goals within a reasonable time frame. Usually, if there is no evidence of rapid progress toward a specific target cost within a relatively short period of time, it is better to either ditch a project or at least shelve it for a short time and then try again, on the assume that new cost reduction methods or less expensive materials will be available in the near future that will make the target cost an achievable one.

2. Finger Pointing:

Another problem with target costing is that a large amount of mandatory cost cutting can result in finger-pointing in various parts of the company, especially if employees in one area feel they are being called on to provide a disproportionately large part of the savings. For example, the industrial engineering staff will not be happy if it is required to completely alter the production layout in order to generate cost savings, while the purchase staff is not required to make any cost reductions through supplier negotiations. Avoiding this problem requires strong interpersonal and negotiation skills on the part of the project manager.

3. Difficulty in reaching a consensus:

Having representatives from number of departments on the design team can sometimes make it more difficult to reach a consensus on the proper design because there are too many opinions regarding design issues. This is a major problem when there are particularly stubborn people on the design team who are holding out for specific product features. Resolving out is difficult and requires a strong team manager, as well as a long-term

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commitment on the part of a company to weed out those who are not willing to act in the best interest of the team.

4. Lack of understanding or relevance:

While target costing has a straight forward logic, the implications in practice are more difficult, particularly when the culture has previously embraced a cost-plus approach to pricing. The cost plus approach is often quicker and does not involve an iterative, inclusive approach to reducing the gap between current costs and target cost as in target costing. The cost-plus approach also does not have a strong market orientation that is a prerequisite for target costing. The term too is seen as limited to the accounting domain and traditionally accountants have not been used to implement production changes, eventhough they have access to the cost data.

5. Cross functional Barriers:

When using target costing within the supply chain, the importance of trust and cooperation is crucial. Transferring previous in-house functions to partners or outsourcing can be a risk due to the inability to monitor or control the output of the desired function. When functions are performed at the manufacturer's plant, expectations and standards are communicated and understood, but these communications are often lost when the function is transferred to one of the partners in the chain. One way to control this problem is by the placement of one of the manufacturer's employees within the supplier's plant to monitor and aid the activities of the supplier.

6. Production Detail:In target costing, the design process must be broken down into its lowest level

components. For example an automobile manufacturer must chart the entire production process and go through a product's complete, lowest-level, bill of materials to uncover areas for improvement - connections that can be made with two screws instead of four, parts that would meet engineering specifications with one weld instead of three, parts that could be installed without painting them first - and many other ways to save a processing step. This detail requires the hands-on involvement of manufacturing, design engineering. product engineering and marketing. While the concept of target costing is intuitively and seemingly simple, the implementation and execution is very difficult. Minor changes, not major innovations, are the goal.

1.5 Target costing: Innovative technique of cost accounting

In today’s rapidly changing business environment, product innovation is one of the keys to a company’s survival and competitiveness. Manufacturers can no longer produce and market large volumes of standard products with a relatively stable market and technological climate. There has been a shift toward unstable, rapidly changing markets and technologies. To implement market-driven management across the organization, measurement and cost control

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systems must be designed to motivate the desired consumer-oriented behavior. The strategies that determine the direction of product innovation have become crucial to corporate management. Industrial marketers play a major role in product innovation, and cost accounting must support this role. Cost management methods must help with the production of new products that meet customer demands at the lowest cost, as well as with cost reduction of existing products by eliminating waste.

Traditional cost-based pricing which became the dominant approach to pricing during the period when products were long-lived and there was relatively little competition. However, in today’s competitive environment, cost-based prices may not be competitive, as worldwide competition places intense downward pressure on prices and removes slack from pricing formulas. Furthermore, due to these competitive pressures, the lifecycle of products and the time to bring new products to the market have reduced.

Target costing is one of the strategic cost management approaches better suited to strengthen a company’s competitiveness in meeting today’s business challenges. A well-designed target costing system incorporates all three elements of the strategic triangle: Innovation, quality, cost, and time. Target Costing has the following innovative applications:-

Interacts with external environment to respond to customer needs and competitive threats.

Considers many complex relationships among functions and across the value chain.

Before the fact, by anticipating and designing costs out of a product before production.

Continuous improvement of cost for both customers and producers over a product’s life.

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(2) Life cycle costing

The main economic principle for assessing the economic value of any assets is that their value to investors be equal to the net present value of the expected future cash flows generated by those assets.

The practical difficulty in making this assessment for regulated monopoly businesses is that the future revenue derived from the assets is itself determined by the regulator; hence the issue of circularity associated with the use of discounted future cash streams as a methodology to value sunk assets. This potential circularity could be eliminated by the use of a replacement cost approach. The value of a network is the sum of the depreciated replacement cost of the assets that would be used if the system were notionally reconfigured so as to minimise the forward looking costs of service delivery.

Life Cycle Costing applies the generic logic of the replacement cost approach and extend this through dynamic consideration of the total assets related costs over the life span of the assets.

Life Cycle Costing is a process of economic analysis to assess the Life Cycle Cost of a product or a project over its life cycle or a portion thereof. Life Cycle Cost (LCC) analysis and Total Cost of Ownership evaluations are the basis for decision making for the wide range of different industries, including the power industry. A main objective of LCC analysis is to quantify the total cost of ownership of a product or a project throughout its full life cycle,which includes research and development, construction, operation and maintenance, and disposal. Life Cycle Costing is a concept used for making decisions between alternative options, optimising design, scheduling maintenance and revamping project planning.

LCC analysis is an economic evaluation technique, which is well suited to compare alternative designs with different cost expenditures over the project life. All relevant costs or whole-life costs (often referred to as through-life costs) should be converted to their equivalent present value (it is not only about the initial investment and acquisition costs, but all cost occurred over the anticipated life cycle must be considered).

The option identified with the lowest total present value is the most economical or least cost option/approach. The whole-life costs of a project are the costs of acquiring (including consultancy, design and construction costs, and equipment), the costs of operating and the costs of maintaining over a whole life of a project through to its disposal. These cost include internal resources and departmental overheads, where relevant; they also include risk allowances as required; flexibility (predicted alterations for known change in business requirements, for example), refurbishment costs and the cost relating to sustainability and health and safety aspects.

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2.1 Definitions

Life cycle

Time interval between a product’s conception and its disposal.

Life cycle cost (LCC)

Cumulative cost of a product over its life cycle.

Life cycle costing

Process of economic analysis to assess the life cycle cost of a product over its life cycle or a portion thereof.

Cost driver

LCC element which has a major impact on the LCC.

Cost profile

Graphical or tabular representation showing the distribution of costs over the life cycle (or portion thereof) of a product.

Life cycle cost breakdown structure

Ordered breakdown of the elements of cost to arrive at a product’s total life cycle.

Availability

The ability of an item to be in a state to perform a required function under given conditions at a given instant of time or over a given time interval, assuming that the required external resources are provided.

(It is assumed that Availability depends on the following three system performance measures:. Reliability, Maintainability, and Maintenance support performance)

Reliability

The probability that an item can perform a required function under given conditions for a given time

interval (t1, t2).

Maintainability

The probability that a given active maintenance action for an item under given conditions of use can be carried out within a stated time interval, when the maintenance is performed under stated conditions and using stated procedures and resources.

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Maintenance support performance

The ability of a maintenance organization, under given conditions, to provide upon demand, the resources required to maintain an item, under a given maintenance policy.

Corrective maintenance

The maintenance carried out after fault recognition and intended to put an item into a state in which it can perform a required function.

Preventive maintenance

The maintenance carried out at predetermined intervals or according to prescribed criteria and intended to reduce the probability of failure or the degradation of the functioning of an item.

Logistics support

The materials and services required to operate, maintain, and repair a system. Logistics support includes the identification, selection, procurement, scheduling, stocking, and distribution of spares, repair parts, facilities, support equipment, and so on.

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2.2 Brief History of LCC analysis

We find one of the roots of LCC analysis in some US-Department of Defense (DOD) programs.DOD has incorporated optimization of LCC into their activities such as logistics, operation, and acquisition. For instance, the concept of minimization of LCC is found in a process named “Integrated Logistics Support (ILS)”, a program called “Acquisition Category One (ACAT I)”and in the “Design-to-Cost (DTC)”procedure.

ILS is defined as “ a composite of elements necessary to assure the effective and economical support of a system or equipment at all levels of maintenance for its programmed life cycle” in DOD Directive (DODD) 4100.35 issued in Nov. of 1968 . The ILS has some derived programs such as NAVMAT, BUPERS, NAVFAC, and other systems commands.

ACAT I is a program for major weapon systems, and details a policy basis for weapon system acquisition processes. The policy is interpreted into DOD Directive (DODD) 5000.1 which is implemented by DOD Instruction (DODI) 5000.2, ”Defense Acquisition Program Procedure” DODI 5000.2 specifies that LCC should be considered for decision at each milestone.

Design-to-Cost (DTC) procedures have been included in all major U.S. Army aviation procurements since 1972. The policy for DTC is addressed in DODD 4245.3 issued in 1983. The DOD’s policy on this concept is; Cost parameter shall be established which consider the cost of acquisition and ownership; discrete cost elements shall be translated into “design to” requirements. DTC goals should be established for all elements of future LCC which are design controllable. Acquisition strategies must then be structured to achieve these goals. In 1989, the DTC program was approved as a tri-service document (MIL-STD-337). Nondirective guidance implementing DTC may be found in the DOD Design to Cost Handbook, DOD-HDBK-787.

During the period of 1970s to the beginning of 1980s, the LCC analysis was mainly applied in the military field. After that period, the applications of LCC analysis have spread to other industries such as aircraft, electrical power plants, etc.

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2.3 WHY USE LCC?

LCC helps change provincial perspectives for business issues with emphasis on enhancing economic competitiveness by working for the lowest long term cost of ownership which is not an easy answer to obtain. Consider these typical problems and conflicts observed in most companies:

1. Project Engineering wants to minimize capital costs as the only criteria,

2. Maintenance Engineering wants to minimize repair hours as the only criteria,

3. Production wants to maximize uptime hours as the only criteria,

4. Reliability Engineering wants to avoid failures as the only criteria,

5. Accounting wants to maximize project net present value as the only criteria, and

6. Shareholders want to increase stockholder wealth as the only criteria.

Management is responsible for harmonizing these potential conflicts under the banner of operating for the lowest long term cost of ownership. LCC can be used as a management decision tool for harmonizing the never ending conflicts by focusing on facts, money, and time.

Why should engineers be concerned about cost details for LCC? It is important to

help engineers think like MBAs and act like engineers for profit making enterprises--It’s all about the money!

Economic calculations are well defined but the discount rate is important (US Government 2002). Accounting and finance organizations set internal discount rates (which often change) to make economic decisions easy for engineers. Discount factors reflect a host of relationships and considerations which include very low risk investment returns such as Government T-bills, factors for projects such as estimated uncertainty errors, internal rates of returns, and so forth.

In general, consider a typical discount value of 12% which is neither very low nor very high for calculations which will follow (the discount rate can also be used for inflation/deflation factors):

1. What is the present value (PV) of US$1.00 today over time? [Think what will be the real value of the loan made to your no-good brother-in-law if it every gets repaid.]

2. What is the future value (FV) of US$1.00 received over time? [Think what will be the value of your pension if you can live long enough to collect on it.]

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Cash flows into/out of a business. The discounting method summarizes transactions over the life of the investment in terms of present or future dollars. Table 1 discount rates (used as multipliers or dividers) put financial transactions into the present value of money to answer the two questions posed above.

Engineering always want a simple, single value, criteria for a project—the answer for LCC is called net present value (NPV).NPV is the present value of proceeds minus present value of outlays. Projects and processes with the greatest NPV is usuallythe winner. Often for incremental changes on a project or within a plant, you lack enough details to arrive at a positive NPV.

Thus many improvement projects must be selected on the least negative NPV values from many alternatives. So once again, we can have the single number engineers always want—it’s NPV but in this case, it’s the least negative NPV. Most fixed assets and other projects have a limited useful life. All equipment has a finite life based on both deterioration and obsolescence. The most common depreciation methods is straight line depreciation based on acquisition cost less salvage. Straight line depreciation is based on consumption of a fixed percentage of the equipment cost. Often straight line depreciation is used for internal accounting reports of profit/loss and for calculating NPV.

Income tax rates vary and may require inclusion of state as well as federal taxes. For calculation purposes, consider the tax rate is 38% based on the profit before tax numbers. Profit before taxes may be positive or negative. When profit before tax is negative, the company receives a tax credit either a carry-back or carry-forward. When profit before tax is positive, the company pays taxes. For a project or process, tax numbers are used to calculate cash flows. After the taxis included, the cash flow is discounted to get present value, and the sum of all present values gives the NPV.

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2.4 ProcedureLCC includes every cost that is appropriate and appropriateness changes with each specific case which is tailored to fit the situation. LCC follows a process . The steps are :

Step 1-Identify what has to be analyzed and the time period for the project life study along with the appropriate financial criteria.

Step 2-Focus on the technical features by way of the economic consequences to look for alternative solutions.

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Step 3-Develop the cost details by year considering memory joggers for cost structures.

Step 4-Select the appropriate cost model, simple discrete, simple with some variability for repairs and replacements, complex with random variations, etc.required by project complexity.

Step 5-Acquire the cost details.

Step 6-Assemble the yearly cost profiles.

Step 7-For key issues prepare breakeven charts tosimplify the details into time and money.

Step 8-Sort the big cost items into a Pareto distribution to reconsider further study.

Step 9-Test alternatives for high cost items such as what happens if maintenance cost is ±10% than planned, etc

Step 10-Study uncertainty/risk of errors or /alternatives for high cost items as a sanity check and provide feedback tothe LCC studies in iterative fashion

Step 11-Select the preferred course of action and plan to defend the decisions with graphicsThe basic tree for LCC combines acquisition andsustaining costs as shown in Figure 2.

Acquisition and sustaining costs are not mutuallyexclusive. If you acquire equipment, you must sustain theacquisition, and you can’t sustain without someone havingacquired the item.Acquisition

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and sustaining costs are found by gathering thecorrect inputs, building the input database, evaluating theLCC and conducting sensitivity analysis to identify costdrivers.

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Acquisition costs have branches for the cost tree shown in Figure 3 as a memory jogger.

Sustaining costs have branches for the tree as shown in Figure 4 which is also a memory jogger. What cost goes into each branch of the acquisition and sustaining branches? It all depends on the specific case and is generally driven by common sense. Building a nuclear power plant to generate electricity requires special categories under each item of acquisition cost and sustaining cost. Building a pulp and paper mill or modifying coke drums at arefinery to prevent characteristic over-stress which occurs during coke drum quench cycles have different coststructures. Include the appropriate cost elements and discard the trivial elements which do not substantially influence LCC. Engineering sizes and aims the LCC cost funnel; production/maintenance pour money into the LCC money funnel.

2.5 Importance of LLC in this eraThe life cycle costs over the life of an asset are widely acknowledged as a better indicator of value for money than the initial acquisition/construction costs alone. For example, the costs of owning and occupying an office building over a 30 year period are typically in the broad ratio of 1 (construction costs) to 5 (maintenance costs) to 200 (cost of the operations being carried out in the building, including staffing costs). It is therefore clear that a greater focus on the maintenance and operating costs of assets rather than on capital costs alone, can deliver significant long term financial and environmental benefits.

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LCC is also a key element in the assessment of environmental sustainability in construction.It provides a tool for the economic evaluation of alternative sustainability options exhibiting different capital, operating costs or resource usage. It also provides methods for evaluating the cost benefits of incorporating more sustainable options into constructed assets.

Clearly the specific benefits to be gained from carrying out a LCC analysis will depend on the purpose of the exercise and the circumstances of the project, asset and client for which it is undertaken. Typical benefits can include:

Transparency of future operational costs . Ability to plan for future expenditure (e.g. through the establishment of sinking funds). Improved awareness of total costs Ability to manipulate and optimise future costs at the design stage. Achieving and demonstrating better value for money in projects Evaluation of competing options, either for entire assets or parts thereof Performance trade-offs against cost (e.g. environmental performance).

2.6 Limitations of life cycle costing

Early Struggle for Profitability

The life-cycle costing method spreads the expense of an asset out evenly over several years. Other methods -- such as double declining balance depreciation or using the provisions of Internal Revenue Service Section 179 -- allow you to deduct more of the asset's expense in the initial years of use. This can be particularly important when you're starting a business and need as many write-offs as possible to reach profitability.

Drop in Productivity

The life-cycle costing concept assumes an asset will be as productive in later years as it is when it's new. This may not be the case. If a piece of equipment, for example, gradually slows down, you'll be earning less income from it while receiving the same write-off you got when the product was first put into production. Though this may make the steady write-off attractive as a percentage of income earned from the asset, that write-off may not be enough to make up for the loss in productivity.

Paying Back Loans

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If you borrow money to purchase an asset, writing off equal amounts of the cost during the asset's life cycle can cost you in interest charges. You'd fare better by writing off a larger portion of the asset during its early years so you can save on taxes and apply the savings to paying down the loan. The earlier you pay down a loan, the lower your interest expenses will be because interest is assessed each month on the remaining balance.

Value of the Dollar

The dollars you write off toward the end of an asset’s life cycle may not have the same value as dollars at the beginning. Because the life-cycle method spreads the dollar cost of an asset over many years in equal increments, a declining dollar could mean that your depreciation becomes worth less and less as years go by. You'd be better off depreciating as much of an asset as possible in the opening years of its life so the dollars you write off will have nearly the same value as the dollars you spent when you bought the asset.

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Analysis of Implementation of Target at the Punjab State Coop. Milk

Producer’s Fed. Ltd

Contact Name:- Bhupinderjit Singh (Dy. Manager, Finance)

The Punjab State Cooperative Milk Producers’ Federation Limited popularly known as MILKFED Punjab, came into existence in 1973 with a twin objective of providing remunerative milk market to the Milk Producers in the State by value addition and marketing of produce on one hand and to provide technical inputs to the milk producers for enhancement of milk production on the other hand.  

Although the federation was registered much earlier, but it came to real self in the year 1983 when all the milk plants of the erstwhile Punjab Dairy Development Corporation Limited were handed over to Cooperative sector and the entire State was covered under Operation Flood to give the farmers a better deal and our valued customers better products.

Objective of the company:

To bring prosperity to Milk Producers in the State through assured market and remunerative prices all round the year.

To provide fresh hygienic milk to urban consumers at reasonable rates.  To ensure viability and growth of Milk Unions by converting surplus milk into

products and ensure their marketing. To modernize existing Plants and upgrade technology from time to time.

 

Mission Statement 

To Support the Milk Producers in uplifting their rural economy, make all the Milk Unions viable and ensure quality Milk & Milk Products to consumers

Vision Statement

  The vision for the next five years is to triple the turnover the federation from

level of INR 7.25 billion in 2006-07 to INR 26 billion in 2012-13. Ensure grass root level presentation of the Cooperative movement. Increase Economies of scale in Milk Unions (Procurement/ Marketing) Capacity expansion and modernization of the dairy plants. Serious thrust on increasing marketing orientation .

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Products:

Milkfed is offering following products to the market. It has formulated company specifications for its milk & milk products to provide standard and quality of products to  consumers.

 

Milk

Cheese & Paneer

Fresh Drinks

Ghee & Butter

Ice-cream

Milk Powder

Fresh Products

Skimmed Milk Powder

Indigeneous Sweets

Skimmed Milk Powder

 

TARGET COSTING AT MILKFED.

Milkfed is using target costing by the name of standard costing since 1994. Earlier they were using performance costing and marginal costing.

1. For the first time ,in 1994 they started using target costing for ice-cream as other

competitors like Amul ,Lotus and BABA ice-cream were entering into the market who were charging less as compared to Verka Ice-cream product.

2. For the second time, they used it for “Pinni” in order to take over market share of

local sweet makers. So,they set the target price for sale as per the market prevailing price.

Benefits or need of transition from performance based costing to Target costing:

Helps to compete with other competitors in the market Helps to eliminate the non performing activities Helps in increasing the market share Better co-ordination among production,marketing and suppliers results in better

product. Production meets the sale targets and hence profit.

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Departments involved in target costing are:

Marketing Production Suppliers Research and development team

Limitation:

Sometimes it become difficult to locate the target area to decrease the cost Can result in the conflict among teams

2006-07 2007-08 2008-09 2009-10 2010-110

5

10

15

20

25

Sales of Ice cream in Verka

Series 2

Sale

s in

lac L

itres

ICE CREAM

Weight (g/lts.) Min. 560-580

Total Solids (Min.) (By wt.) 38.5 

Milk Fat % (Minimum) 13 

Acidity, L.A. % (Max) By Wt. 0.25

Sucrose % Max. (By Wt.) 14.50

Stab. Emul. % Max. 0.5.

Bacterial Count/g (Max) 2,50,000

 

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Coliform/g (Max.)  90

Phosphates Test Neg. 

Costs associated with the ice cream product

Direct cost- Direct material cost, Direct labour cost(for only extra labour employed for

one shift production), Processing cost, Packaging cost.

Indirect costs - Administrative costs, Electricity and water cost, Repair and maintenance,

depreciation of plant/ machinery /vehicles/buildings/furniture. 

Direct Material Cost Qty In Kgs

Rate in Rs.

Cost in Rs.

Cost Per 800 ml Brick

Cost Per 5000ML Gal

Cost of Fat 13 204 2652Cost of Solid not Fat 11 136 1496Sugar 14.5 32 464Miracle Super 0.35 225 78.75Flavour 0.25 400 100Wastage@2% 95.82

4886.57

a.)Direct Material Cost (Rs. For 175.00 Ltrs Of Ice-Cream) 4886.57 22.34 139.62Cost of Nuts(35gms/ltr) 5.13 32.03

b.)Packaging CostBrick Carton 2.66 7.5

c.)Processing Cost per annumFuel and boiler House 1950000Power 3500000Water 400000

5850000 2.6 16.25

d.)Direct labour (For only extra labour employed for one shift production) 578 2.64 14.86

e.)Other Variable CostPetrol,Oil& Lubricant 200Repair and maintenace 150

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other consumables 50400 1.83 10.29

Total Variable cost 37.19 220.55Fixed Cost Per Litre 7Salary 1.5Depreciation 8.5 6.8 42.5Total cost 43.99 263.05

Product Type Bricks Gallons

Variable Cost 37.19 220.55

Realization 41.88 228.71

Contribution 4.69 8.16

Fixed Cost 6.80 42.50

Net Loss 2.11 34.34

MRP 65.00 355.00

As Net loss is Rs.2.11 in case of bricks and Rs.34.34 in Gallons.Volume of Production is

increased in order to achieve the breakeven point.

Where, Breakeven point = (Total Fixed Cost )/(Contribution per unit)

If the cost so obtained increases over breakpoint then it is plus in margin for a company but

increase in production should be atleast such that realization equals the Variable cost.

Break-up of Target Cost for Brick(800 ml) Particulars  Per Unit  PercentageDirect Material 27.47  47% Packaging 2.66 5%Processing 2.60 4%Direct labour 2.64 5%Tax 7.8 13%Other Variable cost(electricity,selling & distribution etc) 14.865 26%Target cost 58.035 100%

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47%

5%5%4%

26%

13%

Contribution in Per Unit Cost (Brick)

Direct MaterialDirect LabourPackaging CostProcessing CostVariable CostTax

Break-up of Target Cost per 5000ml gallon Particulars  Per Unit  PercentageDirect Material 171.65  41 %Packaging 7.5 2%Processing 16.25 4%Direct labour 14.86 3%Tax 38.035 9%Other Variable cost(electricity,selling & distribution etc) 172.22 41%Target cost 355 100%

41%

4%

2%4%

41%

9%

Contribution in per unit cost(5000ml Gallon)

Direct MaterialDirect LabourPackaging CostProcessing CostVariable CostTax

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Analysis of Target Costing at Sarovar Hotels and Resorts

Sarovar Hotels & Resorts pioneered in venturing into the mid-market segment in the Indian hospitality landscape. The Company over a period of 18 years has successfully churned the demand in this segment, and is now the third largest chain in India, with 60 operational hotels across 40 cities in India and overseas. It has a diverse portfolio encompassing hotels, resorts,

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restaurants and corporate hospitality. The properties vary by type, size and the market niche they serve. It provides a consummate and unmatched international hospitality experience at competitive price offerings.

Located in the heart of Chandigarh’s industrial hub is Hometel Chandigarh. The hotel is 10 minutes away from the Chandigarh Railway Station and Airport and also enjoys proximity to Delhi–Chandigarh National Highway and the famous Rajiv Gandhi Chandigarh Technology Park. The hotel offers 114 spacious, air-conditioned rooms coupled with modern amenities and facilities. The 8200 sq. ft. banqueting area is the largest in the city with a capacity to organize and handle receptions of up to 600 guests.

Vision

To strengthen our position as a leading player in the hospitality landscape.

Mission

To provide our guests a superior hospitality experience at excellent value in varied market segments

To provide our employees a great work environment, continuous satisfaction and growth opportunities while treating each other with respect and dignity

To recognize that profitability is essential to our future success and therefore provide our property owners and investors the highest possible returns

To focus on our growth and maintain consistency in product through warm, personalized service and absolute transparency in all our dealings

To contribute positively to our communities and our environment 

Ethos

In the global communion, Sarovar Hotels has capitalized on the emerging business opportunities by adopting a dynamic and performance driven approach, evolving constantly and adapting swiftly.

A strong focus on the proverbial bottom line, continued development of staff and an intricate understanding of the needs of the Indian market and consumer have catapulted the Company to its present glory. Through experts and a comprehensive involvement it tries to make every project a success.

The Company firmly believes that mutual respect, long term partnerships and strong ethics and integrity are essential to achieve ultimate success. It follows the principle - ('collaboration is the key word to mutual success and growth')

Experience

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The Company is managed by competent professionals endowed with a wealth of experience. It is their keen understanding of the hospitality business and their experts in technical knowledge that has propelled the Company to the forefront of the hotel industry.

Sarovar Hotels continues to enter into strategic tie-ups and excels through innovative hospitality solutions. It has pioneered unique food and beverage concepts. Geoffrey's  Pubs are unanimously hailed as some of the finest in the country.

It has been associated with a number of prestigious projects from time share groups, construction giants, premier educational institutes and other industry leaders.

Expertise

Sarovar Hotels is one of the few hospitality groups that has access to a vast reservoir of experienced professionals and technical experts.

The Company offers its partners

A team of thorough professionals with an exemplary track record, all of whom have held senior management positions with the finest hotel companies in India and overseas.

A strong team of corporate operating heads supported by senior specialists in Food and Beverage, Kitchen, Housekeeping, Engineering, Finance and Sales and Marketing.

A strong sales network across India backed by the support of the global sales offices of Carlson Hospitality Worldwide.

A strong nationwide network with the ability to deliver business to hotels. Continuous training and upgrade opportunities. Young and very motivated team of mid-level managers. Strong adaptability, proactiveness and ability to predict and adjust to environmental

forces. Ability to identify market gaps / niches and expand rapidly to fill the same. Ability to attract, retain, train and develop a level of talent otherwise difficult to

achieve for a single unit property. Value for money marketing strategy.

Future

Sarovar Hotels is continuously working towards developing world class systems and a training culture to deliver customer delight by continuously raising the levels of customer satisfaction. It aims to extend the same Sarovar Hotels hospitality experience in every city across India.

There is a constant endeavour to evolve into a progressive organization, which extends equal

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opportunities of growth and progress for all its employees and partners by providing them continuous training and counselling at every stage.

As the Company takes on the challenges of exploring new opportunities in the hospitality business, you are invited to be a part of this journey in achieving mutual goals and setting quality benchmarks for others to follow.

Contact Name: Mr. Narpat Singh (Finance Manager, Corporate)

Summary Of The Conversation and Questionnaire at Hometel Chandigarh

Q. Does your company use the Target or Lifecycle Costing?

Ans. Yes, we do use Target costing in our company.

Q. If yes how long have your company been using this technique?

Ans. We have been using this technique for two years now .We started using it in 2010 at Hometel.

Q. How was the transition ?

Ans. It gave us actual costing figures, after wastage and non chargeable sales.

Q. What goals do you wish to achieve through the use of Target Costing?

Ans.

Cost Control Wastage Costs under control Emphasis on Quality with competitive prices Pre-empt Selling Prices

Q. Which areas/departments are involved in the target and lifecycle costing process?

Ans. Food &Beverage (F&B) Service and Food &Beverage (F&B) Production

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Q. What are the techniques used for implementing target Costing taking place in your company?

Ans. We cannot disclose that but it is done by the F&B controller.

Q. According to you what are the benefits of using Target Costing?

Ans. To be able to control the targeted cost and provide premium services at competitive prices

Analysis of Target Costing at HMT

Incorporated in 1953 by the Government of India as a Machine Tool manufacturing company.

Over the years diversified into Watches, Tractors, Printing Machinery, Metal Forming Presses, Die Casting & Plastic Processing Machinery, CNC Systems & Bearings.

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Successful technology absorption in all product groups through collaborations with world renowned manufacturers & further strengthened by continuous in house R&D.

Today, HMT comprises five subsidiaries under the ambit of a Holding Company, which also manages the Tractors Business directly.

Corporate Vision

To be Global Engineering Conglomerate focused on Customer delight in our fields of endeavour.

Corporate Mission

To establish ourselves as one of the world’s premier companies in the engineering field having strong international competitiveness

To achieve market leadership in India through ensuring customer satisfaction by supplying internationally competitive products and services

To achieve sustained growth in the earnings of the group on behalf of shareholders

Financial Position Of The Balance Sheet

Balance Sheet of HMT ------------------- in Rs. Cr. -------------------

Mar '11 Mar '10 Mar '09 Mar '08

12 mths 12 mths 12 mths 12 mths

Sources Of Funds

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Total Share Capital 760.35 760.35 760.35 760.35

Equity Share Capital 760.35 760.35 760.35 760.35

Share Application Money 443.00 443.00 443.00 443.00

Preference Share Capital 0.00 0.00 0.00 0.00

Reserves -585.35 -506.11 -453.20 -382.41

Revaluation Reserves 0.00 0.00 0.00 0.00

Networth 618.00 697.24 750.15 820.94

Secured Loans 143.72 254.65 341.70 324.91

Unsecured Loans 454.99 366.26 231.42 196.07

Total Debt 598.71 620.91 573.12 520.98

Total Liabilities 1,216.711,318.15 1,323.27 1,341.92

Mar '11 Mar '10 Mar '09 Mar '08

12 mths 12 mths 12 mths 12 mths

Application Of Funds

Gross Block 136.48 136.39 132.49 120.02

Less: Accum. Depreciation 100.40 96.93 93.42 90.36

Net Block 36.08 39.46 39.07 29.66

Capital Work in Progress 2.60 0.82 2.29 7.85

Investments 765.56 765.56 765.71 765.71

Inventories 28.36 29.00 40.38 52.40

Sundry Debtors 72.49 68.64 74.44 104.02

Cash and Bank Balance 1.61 2.69 2.02 7.93

Total Current Assets 102.46 100.33 116.84 164.35

Loans and Advances 550.90 624.66 583.89 574.64

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Fixed Deposits 2.22 1.69 9.64 4.85

Total CA, Loans & Advances 655.58 726.68 710.37 743.84

Deffered Credit 0.00 0.00 0.00 0.00

Current Liabilities 167.55 142.56 124.26 138.74

Provisions 75.54 71.81 70.20 68.37

Total CL & Provisions 243.09 214.37 194.46 207.11

Net Current Assets 412.49 512.31 515.91 536.73

Miscellaneous Expenses 0.00 0.00 0.29 1.98

Total Assets 1,216.731,318.15 1,323.27 1,341.93

Contingent Liabilities 8.09 10.52 14.40 22.71

Book Value (Rs) 2.30 3.34 4.04 4.97

COSTING SYSTEM IN TRACTOR BUSINESS GROUP, PINJORE

Contact Names:- Shri RL Verma (Dy. General Manager, Finance),

Shri Arun Chaddha (Joint General Manager, Finance)

Summary of the conversation that took place.

Target Costing

In our tractor division, we use batch costing and absorption costing system. But target costing is very useful in different areas of our organization i.e. cost reduction, new development of product, design and maintaining better quality of the product etc. Target costing is mainly used in assembly industries and processing industries.

Lifecycle Costing

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Tractor Industry is a manufacturing industry but Life cycle costing mainly used in financial appraisal, value management, risk management and demand management. Hence we do not use life cycle costing.

Questionnaire & Responses

Q1) Does your use company use target and lifecycle costing?

Ans) We use only target costing.

Q2) If yes, for how long have you been following this technique?

Ans) We have been using target costing since the eighties when competition with other players in the field of farming tractors got intense.

Q3) Does your company refer to this technique by any other name? If yes please mention the name.

Ans) No we do not refer target costing by any other name.

Q4) What areas/departments are involved in the target costing?

Ans) 1) Our research and development unit.

2) Planning department that forecasts requirement of raw material.

3) Purchase Department

Q5) What goals do you wish to achieve through target costing?

Ans) 1) To remain competitive in the market while maintaining highest quality control.

2) To attract a major share in the tractor business.

Q6) According to you what are the benefits of target costing ?

Ans) 1) Enhanced presence in the market due to new designs/features coupled with competitive pricing.

2) No wastage of resources.

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Analysis of Life Cycle Costing at Spice Digital

Spice Digital

Spice Digital Limited is a part of the esteemed multi faceted management group Spice Corp

and was incorporated in year 2000. Spice Digital now has significant years of experience in

the VAS services and is committed to be the number one home of trusted, rich and

compelling services in the area of mobile communication, entertainment, infotainment and

commerce by 2011.

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Spice Digital Limited, previously Cellebrum Technologies Limited, is a developer of

Mobile Value Added Services (MVAS) and Internet products, services, and applications

with headquarters at Parwanoo in Himachal Pradesh, India. Spice Digital is a part of

Spice Global, US$2 Billion conglomerate with diversified interests.[1] The Company offers

services for Telecom Operators, Enterprises and Government, using different mobile

connectivity medium of Voice, IVR, SMS, USSD, WAP, 3G & Mobile Applications.

Brand vision

One step ahead of the dreams of the mobile society

History

The company was incorporated in 2000 with a staff of 13. It invested Rs 100 crores, in July

2006, to soup up its technology and expand its product line. It set up a Rs 50 crore incubation

fund for up start ventures. The company doubled its employee strength in 2006 taking its

headcount to 400 by year end. It revamped its operations in 2007 to enhance its Research and

Development capabilities.

Products: Mobile Value Added Services (MVAS), Internet products, services and

applications.

Contact: India Address: Himuda Commercial Complex Opposite Hotel Shiwalik Sector-1

Parwanoo District: Solan (H.P.) Pin Code: 173 220 Fax No: 01792-232344

Phone Numbers.: 01792-232368

COSTING PRACTICES

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COMPANY’S FIXED COST

Fixed Cost = employee’s Salary + Rent+ Electricity, Telephone & other Bills + Overheads.

COMPANY’S VARIABLE COST

Variable Cost = delivery and installation cost+ consumer service cost.

DIRECT EXPENDITUTRE

R and D cost + Labor of each employee + Maintenance Cost + Wages + Other Expenditure.

INDIRECT EXPENDITURE

Delivery and installation cost+ consumer service cost.

GROSS PROFIT =Gross Turnover – Direct Cost.

NET PROFIT =Gross Profit – Indirect cost.

COSTING CONTROL

Total Cost = R&D Cost + Design Cost of Product + Distribution Cost + Customer Service Cost

The Research and Development cost includes the researches done to develop the soft wares wchich

help in programing the VAS(value added services) and the major chunk of it is consumed by the

salaries of the technical leads in the project.

The design cost gives the idea of the designing of the software and it is consumed mainly in graphical

VAS of the project. Distribution cost includes the cost of delivering and installing all the required

software at the clients end. Customer service cost includes the cost of contacting the customer on a

fixed time basis so that the problems can be reviewed and solved if there are any problems. By this

way company finds the actual cost of the software.

Software package of SPICE DIGITAL LTD.

Selling Price of the software (A) Rs 3,300

Sales quantity in units (B) 1lakh

Target revenue (A*B=C) Rs 330000000

Life Cycle Costs

R & D Cost Rs 6,59,00,000

Design Cost of Product Rs 2,23,00,000

Marketing cost Rs 1,94,00,000

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Distribution Cost Rs 19,87,000

Customer Service Cost Rs 39,45,000

Packaging cost Rs 22,00,000

Total Life-cycle incurred Cost(D) Rs 115732000

Life cycle Operational Income (C-D) Rs 214268000

Analysis of Implementation of Target Costing at Avon cycles:

GROUP HISTORY

The beginnings were humble - classic example of the enterprising Punjabi spirit. The

founders Pahwa Brothers dreamt of giving the common man of this country an affordable

means of mobility in those early days of our country’s independence. Excellent quality,

economical price and ethical business dealings earned them instant acceptability. Holding

these values close to their hearts they built the trust brick by brick

Starting up a bicycle saddles and brakes manufacturing unit in 1948, the Pahwas set out on a

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long and arduous journey. Avon Cycles came into being in 1952 when the first batch of 250

bicycles rolled out of its plant.

Starting up a bicycle saddles and brakes manufacturing unit in 1948, the Pahwas set out on a

long and arduous journey. Avon Cycles came into being in 1952 when the first batch of 250

bicycles rolled out of its plant.

The numbers have been going up, ever since. From amongst the pioneers of the Indian

bicycle industry, AVON has remained in the top performers’ position for over half a century.

The promoters’ abiding faith in human values and fairness, built enduring business bonds

with a vast dealer network in India and abroad. High-class technology, consistent quality and

effective after-sales service made up a perfect proposition.

AVON is the only group anywhere in the world with full backward integration. They have

facilities for making almost all the parts, including Steel Balls needed for their Bicycles. This

places them a cut above the rest when we talk of quality born of work culture. They did not

venture into Tyre and Tubes, these being in a different discipline, altogether. To meet their

expanding requirement of raw materials, they

added facilities for making Steel Strips, Steel Tubes and Hot Rolled Steel, achieving full

backward integration, unmatched and unequalled anywhere else.

Today, the Group occupies a unique position in the industry. By way of thanksgiving for its

prosperity, they support two modern hospitals looking after the poor and the less fortunate of

our brethren. 

The family business was reorganised in 1997 and the flagship company is the subject of this

profile.

VISION As a manufacturing company, the company is committed to delivering quality at affordable price. Technological innovation has been one of the most natural advantages of its organisational structure. In fifty-two years of its being, it has invested heavily in its human capital. The highly motivated work force carries a sense of belonging. Their happiness is the key to its growth. Some of the workers joined the company in their youth and now, their second generation is growing with it to be old enough to bequeath their trust to the generation next.

COSTING METHODFrom the information provided by the company following information is interpreted:

Company plans to produce a new product after market research and for a particular population segment (eg. Kids, Girls etc.).

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To decide on price of new bicycle they first check the prices of similar products in market from competitors such as Atlas, Avon decide on Target price of their product equal or less than competitors.

Target profit or income per unit of bicycle is determined. Target Cost is determined by subtracting Target profit from Target price.

To meet the Target price company takes into account production cost,design cost ( cost to design various parts of bicycle),distribution cost ,marketing cost .

Company launches the product in market and according to the demand it produces number of bicycles.

Target cost for bicycle is divided in following parts:

Raw materialLabour Cost Electricity chargesPaint CostPolish CostMaintenance chargesAdvertising costTransport and Distribution Cost

So company uses the basic target costing technique and tries to adjust to target cost.

Analysis of Target costing At BABA DAIRY

About Jas&Me Ice Cream

Jas&Me ice cream brand was started by Baba Dairy which was first under the name of Baba Ice creams. The company was founded by Satpal Singh in 1997 at Chandigarh under the mission to give a tough competition to the major players of Punjab region esp. Verka, Lotus Ice creams etc. The company has vision to be a national player in next 7 years expanding their horizons to complete North Region by 2015.

Contact Name: Mr. Prabhjinder Singh (Co-Owner, Financial Manager)

Summary Of The Conversation and Questionnaire at Sec 21 Chandigarh

Q. Does your company use the Target or Lifecycle Costing?

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Ans. we use Target costing in our company.

Q. If yes how long have your company been using this technique?

Ans. We started using this technique when brands like Verka,Mother Dairy started using this technique to be able to give highest competition as local player.

Q. How was the transition ?

Ans. It helped to get actual cost figures so we could adjust are processing and mix cost accordingly.

Q. What goals do you wish to achieve through the use of Target Costing?

Ans. To be able to providebest quality at Competitive prices and take the brand at National Level

Q. Which areas/departments are involved in the target and lifecycle costing process?

Ans. Production of Mix and Processing department

Q. According to you what are the benefits of using Target Costing?

Ans. Controlling the targeted cost.

Cost of Product Mix -10% fat (160 ltr)Particulars cost100 kg Milk 870030 Kg cream 120010 Kg SMP 170024 Kg Sugar 960400gm Emulsifier 320Total Cost 10480Add Processing Charges 1050Net Cost 11530Mix Per Ltr 72

Brick 1000ml

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 Particulars  Per Unit*  Percentage*Mix cost 40  78.43% Processing 4 7.84%Packaging 4 7.84%Storage 1 1.96%Transportation 1 1.96%Pilferage/Processing Loss 1 1.96%Target Cost 51 100%Dealers Price 72Net Profit 21

40

44 1 1

1

Per unit cost

Mix costProcessing Packaging StorageTransportation Pilferage/Processing Loss

Target & Life Cycle CostingPage 47