It used to be that costs were a fact, which one encountered after finishing a product. These days the emphasis has shifted from performance driven to cost reduction. In order to produce efficient in all phases of the product life cycle, the design phase is critical. It’s said that 70% of the life cycle is determined during design.
In order to reduce the costs there are several product design measures such as Quality Function Deployment, Design For Manufacturing and Assembly, Value Analysis/Function Analysis, Early Supplier Involvement, Activity Based Costing, Target Costing and several guidelines. The last two methods and the guidelines will be described here.
Ever since overhead costs have been accounted for in the making a the price of a product or service this has been done through simple allocation of overhead cost directly to products . This simple manner almost never takes into account that different products make unequal use of the overhead. Rather than allocate overheads to products on an arbitrary basis Activity Based Costing (ABC) assigns overheads on the bases of the activities which cause those costs to occur (so-called cost-drivers). By focusing on activities which consume resources, ABC can reveal more useful information for product costing. This way value adding activities are separated from non-value adding activities.
ABC data provides insight into how supplier costs are incurred in response to the various activities.
Activities relevant to the product or service are identified, quantified and the costs allocated bases on the amount and type of activities used. The activity costs are determined using activity charts, worksheets and cost build-up table. This is a job suitable for designers. They will be able to identify those problematic activities that incur substantial cost and efforts can then be made in reducing these costs. Providing early manufacturing cost information during the design cycle, considerable improvements in productivity and munufacturing costs can be achieved.
The necessary steps in using ABC are:
The only difficulty with using ABC at the design stage is the limited amount of cost-driver information that is available.
To gain and hold market leadership today a company must design the cost out of its products from the outset. Target Costing or Design to Cost is a cost-management technique that lets a company do that by determining how much customers are willing to pay for a product and then designing the product within its limits that will permit the product to be sold profitably at the predetermined price. As such Target Costing is a formal technique to jointly achieve cost targets and performance requirements for product designs.
But as can be expected establishing the target cost does not have to be sufficient. When the target costs are established and the organization can not meet these targets, the planned products cannot be launched. Admitting this can be a hard rule, especially in these innovative times when one is very successful in the design of a new product.
The Japanese where the first to recognize that the most efficient way to keep costs down was to design them out of their products, not to reduce. This Japanese approach is not to minimize the cost of products, but rather to achieve a specified level of cost reduction.
Target Costing shapes the foundations of the organization, specially its products and processes. An iterative process is required, since product designers rarely achieve the target cost on the first pass. This iterative process is conducted by a team of cross-functional teams made up of industrial marketers, cost accountants and others critical to the design and manufacturing decisions needed for the pricemaking.
After deducting the desired profit margin from the projected selling price, planners develop estimates of each product element that make up a product’s cost for design, manufacturing, sales and marketing. Further analysis is carried out to identify and estimate the cost of each component that makes up the finished product.
Whatever technique is used of whatever guideline is applies there are several questions that need to be asked such as:
Answering one of the first five questions with a “no” can be the detection of more severe problems which with the organizations encounters. One must strive for all answers to be “yes”. The motives of an organization must be clear and unambiguous to all participants in order to work together in an efficient and effective way.