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Table of contents

Introduction ......................................................................................................................................2 Target Costing ....................................................................................................................................2 Explanation ...................................................................................................................................3 History ...........................................................................................................................................6 Objectives of Target costing approach .................................................. Error! Bookmark not defined. MAJOR STEPS OF TARGET COSTING ................................................................................................7 Main Features of Target Costing System .........................................................................................8 Advantages of Target Costing .........................................................................................................9 Problems with Target Costing ....................................................................................................... 10 Impact of Target Costing on Profitability ....................................................................................... 11 Life Cycle Costing ............................................................................................................................. 12 Introduction and Concept: ............................................................................................................ 12 Features of Life Cycle Costing ....................................................................................................... 18 Product Life-Cycle ........................................................................................................................ 19 Phases in Product Life-Cycle: ........................................................................................................ 20 Benefits in Product Life Cycle.. 23 Analysis of Implementation of Target and Life-Cycle Costing at AVON CYCLES ................................... 24 Analysis of Implementation of Target and Life-Cycle Costing at Lafarge Ind. Pvt. Ltd. ......................... 25 Analysis of Implementation of Target and Life-Cycle Costing at Philips India Ltd. ............................... 29 ANALYSIS OF IMPLEMENTATION OF TARGET AND LIFE-CYCLE COSTING AT Quark .. Error! Bookmark not defined. Analysis of Implementation of Target and Life-Cycle Costing at Hero Moto Corp. Ltd........ 45 References....................................................................................................................................... 47

Target & Life-Cycle Costing

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In production, research , retail, and accounting, a COST is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production. More generalized in the field of economics, cost is a metric that is totaling up as a result of a process or as a differential for the result of a decision .Hence cost is the metric used in the standard modeling paradigm applied to economic process. Companies nowadays are indulging in two main aspects in order to control cost of their products so as to have an competitive edge in the market: 1) Target Costing 2) Product Life Cycle Costing

Target Costing
Target costing is primarily a technique for profit management. Its objective is to ensure that future products generate sufficient profits to enable the firm to achieve its long term profit plans. This objective can only be achieved if products are designed to satisfy the demands of the firms customers and to be manufactured at a sufficiently low cost. Target costing systems first identify the cost at which the product must be manufactured if it is to achieve its profit objective and then create a disciplined environment to help ensure that the target cost is achieved. Most target costing processes contain three distinct steps, market-driven costing, product-level target costing, and component-level target costing. Market-driven costing is used to transmit the competitive pressure that the firm faces in the marketplace to its product designers and suppliers. This pressure is transmitted by subtracting the target profit margin (i.e., the margin required of the product if it is to enable the firm to achieve its longterm profit objectives) from the target selling price (i.e., the price customers are willing to pay for Target & Life-Cycle Costing Page 2

the product) to determine the products allowable cost (i.e., the cost at which the product must be manufactured if it is to generate the target profit margin at its target selling price). The allowable cost is set by the market, it does not incorporate the capabilities of the firm or its suppliers. Setting the target cost equal to the allowable cost risks setting unachievable targets and thus reducing the effectiveness of target costing. Therefore, in the product-level target costing step, product-level target costs are set that are often higher than allowable costs. These product-level target costs are determined so that they can be achieved, but only if the product designers expend considerable effort on designing costs out of the future products. The objective is to create intense but realistic pressure on the product designers to reduce costs. To create an equivalent pressure on the firms suppliers, component-level target costing is used to focus supplier creativity on reducing the costs of the components they supply. At the heart of componentlevel target costing is establishing the price that the firm is willing to pay for each of the externally acquired components in the new product. Thus, component-level target costing enables the buyer to establish the selling prices of its suppliers. These prices must be realistic and allow the suppliers to make adequate returns if they too expend considerable efforts on designing costs out of their products. Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price. A lengthy but complete definition is "Target Costing is a disciplined process for

determining and achieving a full-stream cost at which a proposed product with specified functionality, performance, and quality must be produced in order to generate the desired profitability at the products anticipated selling price over a specified period of time in the future." This definition encompasses the principal concepts: products should be based on an accurate
assessment of the wants and needs of customers in different market segments, and cost targets should be what result after a sustainable profit margin is subtracted from what customers are willing to pay at the time of product introduction and afterwards. These concepts are supported by the four basic steps of Target Costing: (1) Define the Product (2) Set the Price and Cost Targets (3) Achieve the Targets (4) Maintain Competitive Costs. To compete effectively, organizations must continually redesign their products ( or services) in order to shorten product life cycles. The planning, development and design stage of a product is therefore critical Target & Life-Cycle Costing Page 3

to an organization's cost management process. Considering possible cost reduction at this stage of a product's life cycle (rather than during the production process) is now one of the most important issues facing management accountants in industry. Here are some examples of decisions made at the design stage which impact on the cost of a product. 1. The number of different components 2. Whether the components are standard or not 3. The ease of changing over tools Japanese companies have developed target costing as a response to the problem of controlling and reducing costs over the product life cycle. Now taking any case of a product of any company, there will probably be a range of products and prices, but the company cannot dictate to the market, customers or competitors. There are powerful constraints on the product and its price and the company has to make the required product, sell it at an acceptable and competitive price and, at the same time, make a profit. If the profit is going to be adequate, the costs have to be sufficiently low. Therefore, instead of starting with the cost and working to the selling price by adding on the expected margin, target costing will start with the selling price of a particular product and work back to the cost by removing the profit element. This means that the company has to find ways of not exceeding that cost. For example, if a company normally expects a mark-up on cost of 50% and estimates that a new product will sell successfully at a price of $12, then the maximum cost of production should be $8:

Cost + 100% $8

Mark-up = 50% $4

Selling price 150% $12

But you can not always go for cost reduction in all the aspects for achieving the target costing. Let us explain this point with an example. For example, if you are selling perfume, the design of its packaging is important. The perfume could be held in a plain glass (or plastic) bottle, and although that would not damage the use value of the product, it would damage the esteem value. The company would be unwise to try to reduce costs by economising too much on packaging. Similarly, if a company is trying to reduce the costs of manufacturing a car, there might be many components that could be satisfactorily replaced by cheaper or simpler ones without damaging either use or esteem values. However, there will be some components that are vital to use value (perhaps Target & Life-Cycle Costing Page 4

elements of the suspension system) and others which endow the product with esteem value (the quality of the paint and the upholstery).

Now we will explain this concept of target costing with the help of an example. Handy Appliance Company feels that there is a market niche for a hand mixer with certain new features. Surveying the features and prices of hand mixers already in the market, the marketing department believes that a price of $30 would be about right for the new mixer. At that price, marketing estimates that 40,000 of new mixers could be sold annually. To design, develop, and produce these new mixers, an investment of $2,000,000 would be required. The company desires a 15% return on investment (ROI). Given these data, the target cost to manufacture, sell, distribute, and service one mixer is $22.50 as calculated below:
Projected sales (40,000 mixers $30 per mixer ) Less desired profit (15% $2,000,000) Target cost for 40,000 mixers Target cost per mixer ($9,00,000 / 40,000 mixer) $1,200,000 300,000 -----------$9,00,000 ======= $22.50

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This $22.5 target cost would be broken into target cost for the various functions: manufacturing, marketing, distribution, after-sales service, and so on. Each functional area would be responsible for keeping its actual costs within target.

It emerged in Japan in 1960s as a consequence of difficult market conditions. A proliferation of consumer and industrial of western firms were overcrowding the markets in Asia. Japanese companies were also facing the shortage of resources and skills needed for the development of new concepts, tools and techniques, which were required to achieve parity with the toughest western competitors in terms of quality, cost and productivity. Many Japanese companies considered modified cross-functional activities, as used by western firms for manufacturing .They believed good results can be achieved by combining employees from strategy, planning, marketing , engineering, finance, and production into expert teams. These teams were able to examine new methods and techniques for the design and development of new products aimed at increasing the degree of integration between upstream and downstream activities of the firms operation. Target Costing thus emerged from this background. A range of specialized tools, including functional analysis, value engineering, value analysis and concurrent engineering were introduced to support the target costing. This made Japanese companies particularly effective in the area of product design and development. They were able to identify all relevant elements to formulate a holistic management approach in order to achieve performance levels to meet the firms objective. Now in Japan, target costing is widely practiced, in more than 80 percent of companies in the assembly industries and more than 60 percent of the companies in processing industries.

Objectives of Target Costing

Target Costing is primarily used and most effective in the product development and design stage. Target Costing is intended to get managers thinking ahead and comprehensively about the cost and other implication of the decision they make.

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The Target Costing System has three objectives: 1. To lower the cost of the product so that the required profit level can be ensured. 2. The product meets the level of quality, delivery timing and price required by the market. 3. To motivate all company employees to achieve the target profit during the new product development to make target costing a company-wide profit management activity.


For a successful and comprehensive target costing approach within an organization, We need to follow the given steps 1. Proper study of the market: The most important step in target cost setting is study and thought about pricing which is decided by the market or the future buyers or the target customers. The main emphasis should be on giving the priority to the customer needs and not just the technical requirements as required for the product development .This is a revolution that now design is the outcome of the cost whereas in the past design influenced the cost of the product. 2. Setting of target price based on market studies: Following factors should kept in mind to decide the new target price(the price to be given by the customer) company position, market share, business strategy, competition, elasticity of demand, competitive price response etc. If the company is responding to a request for proposal/quotation, the target price is based on analysis of the price to win considering customer affordability and competitive analysis. 3. Determine the target cost: Once the target price is obtained by the market studies and the data has been compiled and set properly, to calculate the target cost(which the company incurs). We do this by deducting the desired profit margin, warranty reserves, some other uncontrollable market allocation from the selling price of that particular product by studying the need of the customers and the prices offered by our competitors. If we have a provision of non-recurring development costs, they are also subtracted. The target cost is allocated to lower level assemblies of system/subsystems in a manner consistent with the structure of teams or individual designer responsibilities Target & Life-Cycle Costing Page 7

4. Balancing the target cost with the requirements: Its better to study and analyse the derived target price, before finalising the cost to check whether the product being produced, meets the requirements or not. Its the best opportunity to control the cost by making the proper set up of the requirements. It requires a careful understanding of the need and expectations of buyers, analyse and understand the value the customers places on particular product capability, and use of techniques such as quality function deployment and value engineering to help make these sales among various product requirements including target cost. Another opportunity to reduce cost of the product is consideration of the concept of the available multiple alternatives and also by designing the alternatives for both, the product and its manufacturing & support process. This can also be done at the each and every level of the development cycle of the product. These opportunities can be achieved when there are some ideas that can be considered just out of the blue or creative consideration of alternatives developed by R&D coupled with structured analysis and decision-making methods.

Value Engineering
Value engineering, as defined by Cooper and Slagmulder (Cooper 1997) is a systematic, interdisciplinary examination of factors affecting the cost of a product with the aim of devising a means to achieve its specific purpose at the required standards of quality and reliability at an acceptable cost. The Japanese value engineering programs are used to achieve the specified levels of cost reduction for the target cost and not to minimize cost. The relationship for value directly relates two of the survival triplet cost and function and the goal is to increase value while maintaining or increasing reliability. It encompasses improvement in product design , changes in material specifications and modification in process methods.

Main Features of Target Costing System

The main features or practices followed are: 1. Target costing is viewed as an integral part of the design and introduction of new products. As such it is part of an overall profit management process, rather than simply a tool for cost reduction and cost management . The target profit margin is derived from the companys long term business plan, which incorporates its long-term strategic intent and profit margins. Target & Life-Cycle Costing Page 8

2. 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 level of functionality and quality of the new product. These are based on customer requirements and expectations and are often influenced by offerings of the competitors. Since target selling price is market driven and should encompass a realistic reflection of the competitive environment. 3. Integral to the setting of target selling price is the establishment of target production volumes, given the relation between price and volume. The expected target volumes are also critical to computing unit costs, especially with respect to capacity related costs(such as tooling cost) , as product costs are dependent upon the production levels over the lifecycle of the product. Once the target price and required profit margins have been determined, the difference between these two figures indicates the allowable cost or the target cost for the product. 4. 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 functional and quality requirement of the new product. The difference between the current costs and the target cost indicates the required cost reduction that is needed.

5. 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.

Advantages of Target Costing

The main advantages of target costing are: 1. It reinforces top to bottom commitment to process and product innovation to achieve some competitive advantages. 2. It helps to create a companys market-driven management for designing and manufacturing products that meet the price required for the market success. 3. Assures that the products are better matched to their customers needs. 4. Aligns the cost of feature with the customers willingness to pay for them. 5. Reduces development cycle of a product. 6. Reduces costs of products significantly. Target & Life-Cycle Costing Page 9

7. Increases the team work among all internal organizations associated with conceiving, marketing, planning, developing, manufacturing, selling, distributing, and installing a product. 8. Engages customers and suppliers to design the right product and to more effectively integrate the entire supply chain. 9. Proactive approach to cost management. 10. Orients organizations towards customers. 11. Breaks down barriers between departments. 12. Implementation enhances employee awareness and empowerment. 13. Foster partnerships with suppliers. 14. Minimize non value-added activities. 15. Encourages selection of lowest cost value added activities. 16. Reduced time to market.

Problems with Target Costing

Talk with customers about a new product concept, find out which feature they like and dont like, and find out how much they would pay .Subtract an acceptable profit margin , and youre left with the target cost of the product. All, inside and outside the company adhere to this number .Its not this simple. Target Costing has a few problems which are as follows: 1. The development of the process can be lengthened to a considerable extent since the design team may require a number of iterations before it can devise low cost product that meets the target cost and margin criteria. This occurrence is most common when the project manager is unwilling to discontinue a design project that cannot meet its costing goals within reasonable time frame. Usually if there is no evidence, it is better to either drop a project or at least shelve it for a short period of time and then try again, on the belief that new cost reduction methods or less expensive materials will be available in near future that will make the target cost an achievable one. 2. 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. Avoiding this problem requires strong interpersonal and negotiation skills on the part of the project manager.

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3. A design team having representatives from different departments can sometimes make it more difficult to reach a consensus on the proper design because there are too many opinions regarding design issues. 4. Effective implementation and use requires the development of detailed cost data. 5. its implementation requires willingness to cooperate 6. Requires many meetings for coordination 7. May reduce the quality of products due to the use of cheep components which may be of inferior quality.

For every problem area outlined above the proper solution is retaining strong control over the design team, which calls for a good leader. This person must have a very good knowledge of the design process, good interpersonal skills, and commitment to staying within both time and cost budgets for a design project.

Impact of Target Costing on Profitability

Target Costing affects profitability of an organization depending on the commitment of management to its use, the constant involvement of cost accountant in all phases of a products life cycle, and the type of strategy the organization follows. Target costing affects profitability in two ways 1. It places a detailed continuing emphasis on the products cost throughout the lifecycle of every product. The management team is completely aware of costing issues since it receives regular reports from the cost accounting members of all design teams. 2. It also improves profitability through precise targeting of the correct prices at which the company feels it can place a profitable product in the market place that will sell in robust manner. Thus target costing results in better cost control and also better price control.

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Life Cycle Costing

What is Life Cycle Costing? Life Cycle Costing (LCC) also called Whole Life Costing is a technique to establish the total cost of ownership. It is a structured approach that addresses all the elements of this cost and can be used to produce a spend profile of the product or service over its anticipated life-span. The results of an LCC analysis can be used to assist management in the decision-making process where there is a choice of options. The accuracy of LCC analysis diminishes as it projects further into the future, so it is most valuable as a comparative tool when long term assumptions apply to all the options and consequently have the same impact. Why is it important? The visible costs of any purchase represent only a small proportion of the total cost of ownership. In many departments, the responsibility for acquisition cost and subsequent support funding are held by different areas and, consequently, there is little or no incentive to apply the principles of LCC to purchasing policy. Therefore, the application of LCC does have a management implication because purchasing units are unlikely to apply the rigours of LCC analysis unless they see the benefit resulting from their efforts. There are 4 major benefits of LCC analysis:

evaluation of competing options in purchasing; improved awareness of total costs; more accurate forecasting of cost profiles; and performance trade-off against cost.

Option Evaluation. LCC techniques allow evaluation of competing proposals on the basis of through
life costs. LCC analysis is relevant to most service contracts and equipment purchasing decisions.

Improved Awareness. Application of LCC techniques provides management with an improved

awareness of the factors that drive cost and the resources required by the purchase. It is important that the cost drivers are identified so that most management effort is applied to the most cost effective areas of the purchase. Additionally, awareness of the cost drivers will also highlight areas in existing items which would benefit from management involvement. Target & Life-Cycle Costing Page 12

Improved Forecasting. The application of LCC techniques allows the full cost associated with a
procurement to be estimated more accurately. It leads to improved decision making at all levels, for example major investment decisions, or the establishment of cost effective support policies. Additionally, LCC analysis allows more accurate forecasting of future expenditure to be applied to longterm costings assessments.

Performance Trade-off Against Cost. In purchasing decisions cost is not the only factor to be
considered when assessing the options (see VFM briefing). There are other factors such as the overall fit against the requirement and the quality of the goods and the levels of service to be provided. LCC analysis allows for a cost trade-off to be made against the varying attributes of the purchasing options.

Who is involved
The investment decision maker (typically the management board) is accountable for any decisions relating to the cost of a project or programme. The SRO is responsible for ensuring that estimates are based on whole life costs and is assisted by the project sponsor or project manager, as appropriate, together with additional professional expertise as required.

The cost of ownership of an asset or service is incurred throughout its whole life and does not all occur at the point of acquisition.In some instances the disposal cost will be negative because the item will have a resale value whilst for other procurements the disposal, termination or replacement cost is extremely high and must be taken into account at the planning stage.

Acquisition costs are those incurred between the decision to proceed with the procurement and the entry of the goods or services to operational use

Operational costs are those incurred during the operational life of the asset or service End life costs are those associated with the disposal, termination or replacement of the asset or service. In the case of assets, disposal cost can be negative because the asset has a resale value.

A purchasing decision normally commits the user to over 95 per cent of the through-life costs. There is very little scope to change the cost of ownership after the item has been delivered. The principles of LCC can be applied to both complex and simple projects though a more developed approach would be taken for say a large PFI project than a straightforward equipment purchase.

The Process
LCC involves identifying the individual costs relating to the procurement of the product or service. These Target & Life-Cycle Costing Page 13

can be either "one-off" or "recurring" costs. It is important to appreciate the difference between these cost groupings because one-off costs are sunk once the acquisition is made whereas recurring costs are time dependent and continue to be incurred throughout the life of the product or service. Furthermore, recurring costs can increase with time for example through increased maintenance costs as equipment ages. The types of costs incurred will vary according to the goods or services being acquired, some examples are given below. Examples of one-off costs include:

procurement; implementation and acceptance; initial training; documentation; facilities; transition from incumbent supplier(s); changes to business processes. withdrawal from service and disposal

Examples of recurring costs include:

retraining; operating costs; service charges; contract and supplier management costs; changing volumes; cost of changes; downtime/non-availability; maintenance and repair; and transportation and handling.

The Methodology of LCC LCC is based on the premise that to arrive at meaningful purchasing decisions full account must be taken of each available option. All significant expenditure of resources which is likely to arise as a result of any decision must be addressed. Explicit consideration must be given to all relevant costs for each of the options from initial consideration through to disposal. Target & Life-Cycle Costing Page 14

The degree sophistication of LCC will vary according to the complexity of the goods or services to be procured. The cost of collecting necessary data can be considerable, and where the same items are procured frequently a cost database can be developed. The following fundamental concepts are common to all applications of LCC:

cost breakdown structure; cost estimating; discounting; and inflation.

Cost breakdown structure (CBS) CBS is central to LCC analysis. It will vary in complexity depending on the purchasing decision. Its aim is to identify all the relevant cost elements and it must have well defined boundaries to avoid omission or duplication. Whatever the complexity any CBS should have the following basic characteristics:

it must include all cost elements that are relevant to the option under consideration including internal costs;

each cost element must be well defined so that all involved have a clear understanding of what is to be included in that element;

each cost element should be identifiable with a significant level of activity or major item of equipment or software;

the cost breakdown should be structured in such a way as to allow analysis of specific areas. For example, the purchaser might need to compare spares costs for each option; these costs should therefore be identified within the structure;

the CBS should be compatible, through cross indexing, with the management accounting procedures used in collecting costs. This will allow costs to be fed directly to the LCC analysis;

for programmes with subcontractors, these costs should have separate cost categories to allow close control and monitoring; and

the CBS should be designed to allow different levels of data within various cost categories. For example, the analyst may wish to examine in considerable detail the operator manpower cost whilst only roughly estimating the maintenance manpower contribution. The CBS should be sufficiently flexible to allow cost allocation both horizontally and vertically.

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Cost Estimating Having produced a CBS, it is necessary to calculate the costs of each category. These are determined by one of the following methods:

Known factors or rates: are inputs to the LCC analysis which have a known accuracy. For example, if the Unit Production Cost and quantity are known, then the Procurement Cost can be calculated. Equally, if costs of different grades of staff and the numbers employed delivering the service are known, the staff cost of service delivery can be calculated;

Cost estimating relationships (CERs): are derived from historical or empirical data. For example, if experience had shown that for similar items the cost of Initial Spares was 20 per cent of the UPC, this could be used as a CER for the new purchase. CERs can become very complex but, in general, the simpler the relationship the more effective the CER. The results produced by CERs must be treated with caution as incorrect relationships can lead to large LCC errors. Sources can include experience of similar procurements in-house and in other organisations. Care should be taken with historical data, particularly in rapidly changing industries such as IT where can soon become out of date; and.

Expert opinion: although open to debate, it is often the only method available when real data is unobtainable. When expert opinion is used in an LCC analysis it should include the assumptions and rationale that support the opinion.

Discounting Discounting is a technique used to compare costs and benefits that occur in different time periods. It is a separate concept from inflation, and is based on the principle that, generally, people prefer to receive goods and services now rather than later. This is known as time preference. This guidance does not cover the topic in great detail as it is a procedure common to many cost appraisal methods and well understood by purchasing officers. The subject is fully explained in "The Green Book: Appraisal and Evaluation in Central Government 2003". When comparing two or more options, a common base is necessary to ensure fair evaluation. As the present is the most suitable time reference, all future costs must be adjusted to their present value. Discounting refers to the application of a selected discount rate such that each future cost is adjusted to present time, i.e. the time when the decision is made. Discounting reduces the impact of downstream savings and as such acts as a disincentive to improving the reliability of the product.

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The procedure for discounting is straightforward and discount rates for government purchases are published in the Green Book. Discount rates used by industry will vary considerably and care must be taken when comparing LCC analyses which are commercially prepared to ensure a common discount rate is used. Inflation It is important not to confuse discounting and inflation: the Discount Rate is not the inflation rate but is the investment "premium" over and above inflation. Provided inflation for all costs is approximately equal, it is normal practice to exclude inflation effects when undertaking LCC analysis. However, if the analysis is estimating the costs of two very different commodities with differing inflation rates, for example oil price and man-hour rates, then inflation would have to be considered. However, one should be extremely careful to avoid double counting of the effects of inflation. For example, a vendors proposal may already include a provision for inflation and, unless this is noted, there is a strong possibility that an additional estimate for inflation might be included.

Risk assessment Cost estimates are made up of the base estimate (the estimated cost without any risk allowance built in) and a risk allowance (the estimated consequential cost if the key risks materialise). The risk allowance should be steadily reduced over time as the risks or their consequences are minimised through good risk management. Sensitivity The sensitivity of cost estimates to factors such as changes in volumes, usage etc need to be considered Optimism bias Optimism bias is the demonstrated systematic tendency to be over-optimistic about key project parameters. In can arise in relation to:

Capital costs; Works duration; Operating costs; and Under delivery of benefits.

Optimism bias needs to be assessed with care, because experience has shown that undue optimism about benefits that can be achieved in relation to risk will have a significant impact on costs. A recommended approach is to consider best and worst case scenarios, where optimism and pessimism Target & Life-Cycle Costing Page 17

can be balanced out. The probability of these scenarios actually happening is assessed and the expected expenditure adjusted accordingly.

Features of Life Cycle Costing

It includes Non-production Costs. Non-production costs are large. Production costs are often visible by product in most accounting systems. However, costs associated with R&D, design, marketing, distribution and customer service are less visible on a product- by-product basis. When non-production costs are significant, identifying these costs by product is essential for target pricing, target costing, value engineering, and cost management. The development period for R&D and design is long and costly. When a high percentage of total life-cycle costs are incurred before any production begins and before any revenues are received, it is crucial for the company to have as accurate a set of revenue and cost predictions for the product as possible. This is important information for deciding whether the company should commence costly R&D and design activities. Many of the costs predicted to be incurred over several years in production, marketing, distribution and customer service are locked in at the R&D and design stages. If the product fails to meet promised quality-performance levels, the costs of marketing, distribution, and customer service would be even higher. A life-cycle revenue and cost budget prevents these causal relationships among business function costs from being overlooked in decision making. Life cycle costing facilitates value engineering at the design stage before costs are locked in.

WHAT GOES INTO LCC? LCC includes every cost that is appropriate and appropriateness changes with each specific case which is tailored to fit the situation. 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. Target & Life-Cycle Costing Page 18

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 to simplify 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 to the LCC studies in iterative fashion Step 11-Select the preferred course of action and plan to defend the decisions with graphics

Acquisition and sustaining costs are not mutually exclusive. If you acquire equipment, you must sustain the acquisition, and you cant sustain without someone having acquired the item. Acquisition and sustaining costs are found by gathering the correct inputs, building the input database, evaluating the LCC and conducting sensitivity analysis to identify cost drivers.

Product Life-Cycle
Products and services typically pass through a series of distinct phases which is termed as the product life-cycle. Product life cycle is the pattern of expenditure, sales level, revenue, and profit over the period from new idea generation to the deletion of a product from the product range. Product life-cycle costing is a way to enhance the control of manufacturing costs. The thrust of product life-cycle costing is the distribution of costs among categories changes over the life of the product, as does the potential profitability of a product. Hence, it is important to track and measure costs during each stage of a products life-cycle; R&D, design of products, production, marketing, distribution and after sales service. It is known that the majority of products are determined at an early stage of the product life-cycle. It is critical to control costs in the development stage of a product even though much of the product costs are not actually incurred until later. In the traditional cost accounting system, Target & Life-Cycle Costing Page 19

however, cost analysis is usually conducted at the end of the life-cycle(i.e. production stage) when not much can be done to change the cost structure. Product life-cycle costing approach is used to provide a long term picture of the product line profitability, feedback on the effectiveness of life-cycle planning and cost data to clarify the economic impact of alternatives chosen in the design engineering phase etc. The major benefit of adopting product life cycle costing is that it provides an overall framework for considering total incremental costs over the entire life span of a product, which in turn facilitates the analysis of parts of the whole where cost effectiveness might be improved.

Life-Cycle Costing Procedures

In its standard form, life-cycle costing cannot be used for financial reporting and in and of itself is not consistent with generally accepted accounting principles (GAAP). However, life-cycle costing is perhaps the best form of costing from a planning standpoint, and is a great tool that can be used by product managers throughout the life-cycle of a product. Depending upon scientific management needs varying levels of detailed information may be captured by Managements Accountants for selected phases of life cycle. In order to use life-cycle costing to its fullest, costs must be calculated from the point of the initial idea for the product, until the product is no longer made. These costs are then divided by the total number of expected units to be sold throughout the lifetime of the product to come to a total cost per unit. This process can help product managers to get a realistic view of the total cost of a product, so they can design and adjust accordingly.

Phases in Product Life-Cycle:

There are four distinct phases in the life-cycle of a product as shown in the figure

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1. Introduction Phase - Research and engineering skill leads to product development. The product is put on the market and its awareness and acceptance are minimal. Promotional costs will be high, sales revenue low and profits probably negative. The skill that is exhibited in testing and launching the product will rank high in the phase as critical factor in securing success and initial market acceptance. Sales of new products usually rise slowly at first. Depending upon the degree of product newness, retarding factors are as follows: A small number of innovative customers most cannot afford the new product e.g. the prices of first colour TV sets and electronic calculators were very high. Customers prefer the security of tried brands. Difficulties in building up effective distribution. Technical problems of assuring product quality and reliability characterize the introductory stage. Production capacity is limited. Profits are negative or low despite little competition so far. This is owing to high unit costs resulting from low output rates, and heavy promotional investments incurred to stimulate growth. The introductory stage may last from few months to a year for consumer goods and generally longer for industrial products.

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2. Growth Phase In the growth phase, product penetrates into the market and sales will increase because of the cumulative effects of introductory promotion, distribution. Since costs will be lower than in the earlier phase, the product will start to make a profit contribution. Following the consumer acceptance in the launch phase it now becomes vital or secure wholesaler/ retailer support. But to sustain growth, consumer satisfaction must be ensured at this stage. If the product is successful, growth usually accelerates at some point, often catching the innovator by surprise.The acceleration results from the following 4 factors: The larger pools of imitators or conventional consumers begin to follow the lead of the innovators. The market is broadened by market segmentation, product differentiation and higher levels of promotion as competitors increasingly seek to jump on the bandwagon. Product improvements take place. The number of distributors increase and the consequent filling up of the distribution pipelines cause an exaggerated jump in factory sales. Profit margins peak during this stage as experience curve effects lower unit costs and promotion costs are spread over a larger volume.


Maturity Phase This stage begins after sales cease to rise exponentially. The causes of
the declining percentage growth rate are the market saturation- eventually most potential customers have tried the product and sales settle at the a rate governed by population growth and the replacement rate of satisfied buyers. In addition there were no new distribution channels to fill. This is usually the longest stage in the cycle, and most existing products are in this stage. The period over which sales are maintained depends upon the firms ability to stretch the cycle by means of market segmentation and finding new uses for it. Profits decline in this stage because of the following reasons : The increasing number of competitive products. The innovators find market leadership under growing pressure. Potential cost economies are used up.

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Prices begin to soften as smaller competitors struggle to obtain market share in an increasingly saturated market. Sales growth continues but at a diminishing rate because of the diminishing number of potential customers, who remain last of the unsuccessful competing brands, will probably withdraw from the market. For this reason sales are likely to continue to rise while the customers for the withdrawn brands are mopped up by the survivors. In this place there will be stable prices and profits and the emergence of competitors. There is no improvement in the product but changes in selling effort are common. Profit margin slip despite rising sales.

4. Decline Phase - Eventually most products and brands enter a period of declining sales. This may be caused by the following factors: Technical advances leading to project substitution. Fashion and changing tastes. Exogenous cost factors will reduce profitability until it reaches zero at which point the products life is commercially complete. Sales begin to diminish absolutely as the customers begin to tire of the product and the product is gradually edged out by better products or substitutes. Cost control is especially important in the period of decline in order that the product may be deleted before it begins to incur losses. Availability of better and less costly substitutes in the market accounts for the arrival of this phase.

Benefits of Product Life-Cycle Costing

The product life cycle costing results in earlier actions to generate revenue or to lower costs than otherwise might be considered. There are a number of factors that need to be managed in order to maximize return on a product. Better decisions should follow from a more accurate and realistic assessment of revenues and costs, at least within a particular life cycle stage.

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Product life cycle thinking can promote long-term rewarding in contrast to short-term profitability rewarding. It provides an overall framework for considering total incremental costs over the entire life span of a product, which in turn facilitates analysis of parts of the whole where cost effectiveness might be improved. It makes relatively easy for management to recognize the profit implications of design changes, product obsolescence, price variations and so on in isolation, for a particular product. It is the way of portraying the cash flow, profitability and sales level of a product. Life-cycle costing and value engineering is also used for the management of environmental costs.

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Analysis of Implementation of Target and Life-Cycle Costing at AVON CYCLES

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 countrys 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 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 Target & Life-Cycle Costing Page 25

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.

Sh. Sohan Lal Pahwa is the Chairman. Mr. Onkar Singh Pahwa leads the team as Managing Director. His two sons serve as full time working directors. The elder Rishi Pahwa, has Purchases and Works under him and the younger Mandeep Pahwa looks after Sales and Finance. There is hierarchy of senior Vice Presidents, Vice Presidents and General Managers heading various functions.

The organisation combines the simplicity and speed of a family business and the broad-based features of corporate functioning. The former inspires trust, and the latter confidence in its ability to perform continually and consistently.

The Companys Head Office and manufacturing units are conveniently located on the G.T. Road at Ludhiana, a buzzing industrial city in the northern state of Punjab. The city is well connected with other major cities and ports by Rail, Road and Air. The national capital Delhi is 300 KM away. Placed on an 85,000 square meters site in the cycle capital of India, AVON is a truly integrated bicycle manufacturer rolling out an impressive 1.5 million true born machines per annum: most modern plants and machinery systems, comparable to the best in the world, make it possible.

Years of trust building has earned AVON the status of a household name. AVON, APSARA and BUKE have become synonymous with dependable quality at competitive price.

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 Target & Life-Cycle Costing Page 26

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. They have grown with the company. Mr. Deepwant Pahwa (E.D.) helped me in providing various cost details related to the manufacturing of their companys product MISS INDIA (ladys bicycle). After comparing the data provided by them and theoretical aspects of target and life-cycle costing i concluded that they use 4 steps in implementing their costing system.

Four main steps are:

1. They developed a product that satisfies needs of customers( girls in this case). They launched this model (MISS INDIA) of bicycle after the launch of a same kind of model by Hero Cycles. 2. They choose a Target price well below that of Hero Cycles whose prices were somewhere around 2300 to 2350 as compared to their target price of around 2200. 3. They expected to make target operating income of Rs. 400 (approx.) per each bicycle of this sold of this particular model i.e. around 18% of the target price. Target cost per bicycle = 2200 - 400 = Rs. 1800 4. They achieve this target price by performing value engineering and also by implementing the product life-cycle costing which takes into account design costs, production costs (special machinery only for this model), marketing costs, distribution costs, and costs of the defects which are to be reworked. Also it includes redesigning which is basically making the appearance more stylish or using brighter colors.

After the design of the product the company provides a picture of the model or sometimes also a sample of the bicycle to the respective retailers or dealers to know the demand of the particular model in the market and accordingly the company produces the no of bicycles. The advantage in bicycle industry is that same raw material, dyes, paints etc. can be used to make other models also.

Break up of the Target cost of the Bicycle (Beautiful Magic) as given by the official is: Raw Material Labour Electricity Expenses Target & Life-Cycle Costing Rs. 1500 Rs. 15 Rs. 20 Page 27

Overheads Transportation Cost Administration expenses Advertisement Cost Paint cost Total Cost

Rs. 150 Rs. 30 (Delivery Cost) Rs. 30 Rs. 30 (Marketing Cost) Rs. 25 Rs. 1800

All costs are approximated as told by the official. Overheads includes bank interest (Rs. 75), *recovery of payment (Rs. 30), gift items for the good dealers like key chains, pens, suitcases, watches etc, life cycle cost i.e. design cost and production cost which is about 15% of the overhead cost. Delivery cost is variable. Rs 30 is for near by places like Mohali, Panchkula. For other states of Harayana it is around Rs. 60 to 80 and for Maharashtra it can go upto Rs. 120 and for places to the farther south it can go upto Rs. 250. Analyzing the data and how the company implements the Target and Life-cycle Costing in their costing of this particular bicycle model it can be seen that there is not much deviation from the theoretical concept except for the variation in setting the sales target (no. of bicycles) to be sold as in bicycle industry demand drives the production of the product.

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Analysis of Implementation of Target and Life-Cycle Costing at Lafarge India Pvt. Ltd. Lafarge India Pvt. Ltd.
World leader in building materials, Lafarge has an established presence across all major cities and towns in India. The group responds to the needs driven by its customers, business associates, shareholders, regional authorties and local communities. Lafarge through its specialist solutions under - Cement, Aggregates & Concrete and Gypsum enable and empowers its customers by bringing innovation & sustainability to their construction.
Lafarge the world's largest cement manufacturer entered the Indian market in 1999 through its cement business, with the acquisition of Tata Steel's cement activity. This acquisition was followed by the purchase of the Raymond Cement facility in 2001. Lafarge is one of the leading players in the cement industry in Eastern and Central India, with its leading brands - Concreto and Duraguard. The company currently has four cement plants in India: two integrated cement plants in the state of Chhattisgarh (Sonadih and Arasmeta) and Grinding Units in Jharkhand (Jojobera) and West Bengal (Mejia).Lafarge's total cement production capacity in the Indian market currently stands at around 7 million tons and the Group has launched an ambitious program to more than double its capacity in the next five years.

Vision & values

The undisputed leader in building materials Upholding commitments to all stakeholders

The Lafarge Way- The Lafarge Way is built around 3 concepts-

Making our employees successful: Lafarge aims to enable each individual to succeed. Delivering continuous performance improvement: Lafarge continually strives to optimize its products and services. A multilocal organization: Lafarge's goals are local but remain integrated into our global approach.

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Costs associated with the cement product Direct cost- Direct material, direct labor, Direct Supervisory costs, Packaging. Indirect costs- Advertisements, Telephones, Administrative costs, Electricity, Marketing,
depreciation of plant of machinery /vehicles/buildings/computers/furniture

Particulars Sales Less: VAT @ 13.5% Less: Excise duty @ 10% Less: excise duty @ Rs.8/unit Less: Educational cess @ 2% Less: SH edu cess @ 1% Sales (net off taxes) Less:operating profit margin Target cost

Statement of Target Cost Per Unit 300 35.6828 31.216 8 0.62432 0.31216 232.16 46.43


100% 20% 80%

Break-up of Target Cost Particulars Raw Material Clinker Gypsum Fly ash Labour Transportation cost Other Overheads(electricity,selling & distribution etc)
Target & Life-Cycle Costing

Per Unit* 100 5 5 11 50 14.73

Percentage* 53.84% 2.69% 2.69% 5.92% 26.92% 7.93%

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Target cost



*These values are approximate as the values told by the official were in approximate percentage in
order to maintain confidentiality of the data.

Per Unit*
Raw Material 14.73 Clinker 50 100 11 5 5 Gypsum

Fly ash

After analyzing the costing undertaken at Lafarge India Pvt. limited and the theoretical concepts of Target Costing and Lifecycle Costing it can be said that although Lafarge India Pvt. limited implements Target Costing but Life Cycle Costing Implementation is not as explicit as per theory.

Analysis of Target costing and Life cycle Costing at Lafarge India Pvt. Limited
1. The target price is set depending primarily on the competitors offering .For their cement product , the main competitor was ACC cement which is priced at Rs. 295 and Ambuja cement which is priced at Rs. 305. Customer response was studied from collecting data from registration authority and market research. After assessing the factor of production and capability target price for Lafarge cement was fixed at Rs. 300. Since it was manufactured to give better strength and quality performance it could be priced higher than the competitor. Target & Life-Cycle Costing Page 31

2. A profit margin of around Rs 30 is set on Lafarge cement as per the business policies. ACC cement charged a profit margin of only Rs 20 per bag. This is because Lafarge limited being a new player capacity in the market thrives on large profit margins whereas ACC Limited already established can thrive on small profit margin. 3. Target Cost is achieved after subtracting the Profit margin and Taxes from the Target Price. 4. Depending on this set Target Cost , Cost Reduction initiatives are undertaken performing value engineering and also by implementing the product life-cycle costing which takes into account R&D cost, design costs, production costs, marketing costs, distribution costs, and costs of the defects which are to be reworked. At Lafarge India limited R&D and Design cost form a meagre part of the cost as they do not indulge into a product that requires a major change in the production line. Major cost reduction initiatives are undertaken in the production stage. For example in order to lower down the cost a low grade clinker can be chosen. But this cannot be done indiscriminately as quality is the selling point for Lafarge cement.

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Analysis of Implementation of Target and Life-Cycle Costing at Philips India Limited

The foundations of Philips were laid in 1891 when Anton and Gerard Philips established Philips & Co. in Eindhoven, the Netherlands. The company begun manufacturing carbon-filament lamps and by the turn of the century, had become one of the largest producers in Europe. Stimulated by the industrial revolution in Europe, Philips first research laboratory started introducing its first innovations in the xray and radio technology. Over the years, the list of inventions has only been growing to include many breakthroughs that have continued to enrich peoples everyday lives. IN PHILIPS, we strive to introduce meaningful products and technologies for our customers and end users. Our main aim is to explore new ways to improve products and offer an exciting range of products that will enhance your live simultaneously anticipate your needs. At the forefront of technology, Philips currently holds about 75,000 rights 22,000-trademark registration and 6,000 design registrations. Below are some of the important market introductions of recent years. At Philips, we recognize that the products we make and the service we provide no affect the peoples who use them and the environment. As we recognize our responsibilities and we care about the environment too. For 30 years, we continually work towards enhancing environmentally safe products, processes and services. Visit our Green Lighting section, if you wish to find out more. By our commitment in Philips Lighting, we hope to make a real difference in your lives.

Incorporated in 1983 Product Quality Certification by Bureau of standards in 1987 Awarded ISO-9002 Certification from British Standards Institute in 1994, now a ISO 9001:2000 Company Target & Life-Cycle Costing Page 33

Declared champion of APR BG Lamps Factories for the year 1995 Philips Quality Leadership Award to Mr.S.Talwar (M.D) in 1996 First Lamp Factory to win PQA-90 Award in 1999 First Lamp Factory in India to win PBE Bronze for Business Excellence Installed Capacity 170 Million Incandescent , 67 million fluorescent Lamps & 47 million of tubular glass shells per annum Parag Mahajanis Best Performance Award Golden Peacock Award for Excellence In Corporate Social Responsibility ICC Award 2008 for P.C.A Stadium Lighting Silver And Bronze for Industrial Design Excellence Award by NGO for a Low Smoke Biomass Stove


Philips India Limited was incorporated in 1983 as a joint venture company in Mohali, a town situated near Chandigarh by koninklijke Philips electronics N.V. Holland, Anand group of industries and Punjab state industrial development corporation. However, over years the Philips has increased its stake and PALI has become a majority share holding company of Philips . The lamp manufacturing activities at PALI was commenced in the year 1985 with two GLS (a group) units and one TL head mechanized unit. Starting with the production of one wattage of incandescent clear lamps and slim line fluorescent(TLD) lamps, the plant has added additional GLS ,VTL and CFL units.The company is managed by a team of managers headed by the managing director who reports administratively to the board of directors and functionally to vice president B.G. lamps Phillips

India limited.As part of backward integration of manufacturing business, a state of the art
technology, tubular glass shell unit was commissioned in Dec99.In order to further consolidate its market leader position and production target new high speed B-group GLS chain has been commissioned. Over the year Phillips has increased its stake and PALI has become a majority share holding (4%) company of Phillips. It has now become the largest lamp manufacturing Factory in India with an installed capacity of 170m and 55m. Fluorescent Lamps and 47M of tubular glass shell per annum respectively Target & Life-Cycle Costing Page 34

,with strength of over 1000 employees. There are plans to further augment the installed capacities to 243 m of GLS and 67 m TL lamps in the current year. The total operation efficiencies, fall-off Rates, overall productivity and consequently asset utilization at PALI have consistently been improving and now compare favorably with the best in class.In order to consolidate its market leader position and production target new high speed B Group GLS chain has been commissioned with CFLs one unit in order to meet customers need and requirement . At present the approximate production figure for different products is as given per annum basis: VTL :- 55 Millions GLS :- 47 Millions CFL :- 170 millions.

Four main steps involved for target costing are:

1. Philips developed a product that satisfies needs of customers,ie,5w CFL bulb in this case as it was more efficient than incandescent bulbs and also trying to compete with the various other big manufacturers like Havells India,Surya,etc. 2. They choose a Target price similar to their competitor Havells India, rather it was Rs.2 higher than Havells. But they started giving a long warranty,i.e, 15 months as compared to Havells which gave a warranty of only 12 months to the consumers. 3. They expected to make target operating income of Rs. 16 - 18 (approx.) per piece of the CFL sold of this particular wattage i.e. around 20 - 25% of the target price. Target cost per unit CFL = 75 - 58 = Rs. 17 . 4. They achieve this target price by performing value engineering and also by implementing the product life-cycle costing which takes into account design costs, production costs (special machinery only for this model), marketing costs, distribution costs, and costs of the defects which are to be reworked. Also it includes redesigning which is basically making the appearance more stylish. Also in addition to this a new plant is coming up in the mohali plant which is based on the laser technology as it will help in easy cutting and moulding of glass used in the manufacturing of the CFL. Alongwith this it will also help in cutting the high electricity costs involved in semi automatic machines and also reducing the expenses on LPG as it was the Target & Life-Cycle Costing Page 35

major source for moulding of the glass in the company due to its environment friendly nature. The main reason why the CFL of Philips captured a bigger sector than Havells inspite of a Rs.2 higher MRP was due to the fact that the intensity of light was 250 lumens in case of Philips as compared to the 240 lumens in case of havells. Also they gave a 3 month longer warranty than Havells, but soon Havells also increased its warranty time period. Still the sales were high due to high output intensity of the bulb.

Analysis of cost for manufacturing 5W CFL in Philips :

COMPANYS FIXED COST Fixed Cost = employees Salary + Rent+ Electricity, Telephone & other Bills + Overheads. COMPANYS VARIABLE COST Variable Cost = delivery cost+ consumer service cost. DIRECT EXPENDITUTRE R and D cost + Labour of each employee + Other Expenditure. INDIRECT EXPENDITURE Delivery cost+ consumer service cost. GROSS PROFIT =Gross Turnover Direct Cost. NET PROFIT =Gross Profit Indirect cost.

Analysis of target cost of Philips India of a 5w CFL bulb :

Statement of Target Cost Particulars Sales Less: Taxes (Excise+Education cess+Higher education Tax) 10 Per Unit 85 Percentage

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Sales (net of taxes) Less: Operating profit margin Target Cost

75 17 58

100% 22.66% 77.34%

Break-up of Target Cost Per Particulars Raw Material - Glass -Calcium & Phosphate powder -LPG -argon gas cylinders -Tungsten and Molybdenum wires Labour Transportation Cost Other Overheads(Electricity, LPG, Selling and Distribution overhead) Target Cost 13 58 22.4% 100% 11 3 18.96% 5.1% Unit* 33 Percentage* 56.9%

*These values are approximate as the values told by the official were in approximate percentage in order to maintain confidentiality of the data.

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raw material transportation cost labour other overheads

After analyzing the costing undertaken at Philips and the theoretical concepts of Target Costing and Lifecycle Costing it can be said that although Philips implements Target Costing but Life Cycle Costing Implementation is not as explicit as per theory. The design cost gives the idea of the designing of the blue print of the CFL and it is consumed mainly in graphical design 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 manufacturing the CFL.

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Analysis of Implementation of Target and Life-Cycle Costing at Quark

About Quark
Founded in Denver, Colorado, in 1981, Quark was named after the subatomic particle proposed as the building block for all matter. The vision was to create software that would lay the foundation for modern publishing. For 30 years, Quark has delivered on its mission to be a leading provider of publishing software and solutions for customers of all sizes, whether professional designers, small and mid-sized businesses, or large organizations.

Quark's vision is to continuously innovate in desktop publishing, lead the dynamic publishing market, and help small and mid-sized businesses promote themselves easily, professionally, and affordably.

We are dedicated to developing design and publishing software that helps clients of all sizes deliver a superior experience to their customers while meeting on-going demands to do so better, faster, and cost-effectively.

Technology Partners
Quarks philosophy of engaging in a Technology partnership is to leverage the technical expertise of partner to build world-class solutions. The technology partners provide technical support; training & latest tools to enable Quark applications become best in breed and world-class. Quark has engaged itself in various go to market programs with technology partners, providing customers with one stop shop solution and reducing the total cost of ownership. Target & Life-Cycle Costing Page 39

Some of the technology partners of Quark are:1. ALFRESCO 2. ALTOVA 3. AQUAFADAS 4. ASTORIA 5. BAKER & TAYLOR 6. BLIO 7. NEWSGATAR 8. PICTURESAFE

Strategic Partner
1) Microsoft 2) IBM 3) Designed for EMC

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Global Publishing Software Products

Free Open Source
Scribus Passepartout Lyx Fatpaint

Adobe Indesign Adobe Pagemaker QuarkXpress Framemaker Greenstreet Microsoft publisher Microsoft word 2009 IStudio publisher Prince XML Print shop Ovation Pagestream Ragtime Serif page plus Ventura publisher Ultra XML Inpage Interleaf Prefis Bookmachine

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About QuarkXpress
Quark introduced its flagship software -QuarkXPress - in 1987, delivering precision typography, layout, and color control to the desktop computer to change the way people publish around the world. By 1990, QuarkXPress 3 had become the software of choice for publishers worldwide. With the 1997 release of QuarkXPress 4, QuarkXPress quickly became the world's most widely used professional page-layout software. More than five billion pages have been produced using QuarkXPress, and more than three million QuarkXPress users worldwide are benefiting from a new generation of rich design capabilities for print, Web, and interactive media. Quark expanded on its publishing foundation in 1992 with Quark Publishing System, introducing client/server-based publishing software to connect designers, writers, editors, and other contributors to the publishing process through collaborative workflows. The 2001 release of QuarkXPress Server ushered in a high-performance publishing engine that fused automation with professional design, helping organizations produce compelling communications across the Web and in automated publishing processes to produce high-impact catalogs, on-demand custom sales literature, localized advertisements, design-rich database publishing, personalized direct mail, and more.

Features of QuarkXpress
Easy to use Powerful design tool Precision typography Layout automation Reliable print output Collaboration Integration with other application

R & D of the Software Distribution of different modules in the team Development of one module per team Assembling of the all finished modules to get the desired software Software testing

Delivery to client and installation Maintenance for the required period

Total Cost = R&D Cost + Design Cost of Product + Distribution Cost + Customer Service Cost The R and D cost includes the researches done to develop the helping soft wares 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 design 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.

COMPANYS FIXED COST Fixed Cost = employees Salary + Rent+ Electricity, Telephone & other Bills + Overheads. COMPANYS 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.

Software package of QuarkXpress Selling Price of the software (P) Sales quantity in units (Q) Target revenue (P*Q) Rs 4,000 1lkh Rs 40,00,00,000

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Life Cycle Costs R & D Cost Design Cost of Product Marketing cost Distribution Cost Customer Service Cost Packaging cost Rs 8,76,00,000 Rs 3,23,00,000 Rs 3,34,00,000 Rs 19,87,000 Rs 41,85,000 26,00,000

Total Life-cycle incurred Cost

Rs 16,20,72,000

Life cycle Operational Income

Rs 23,79,28,000

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We collected this data from the gurgaon manufacturing plant of Hero Motors Corp. We did not get the exact or official data for our project because of the security concerns of the company . And so the data given in this report is approximated and not exact. This is done to show how the life cycle costing is done by using approximated values of the fields required.

About the company:Hero MotoCorp Ltd. (Formerly Hero Honda Motors Ltd.) is the world's largest manufacturer of two wheelers, based in India. In 2001, the company achieved the coveted position of being the largest two-wheeler manufacturing company in India and also, the 'World No.1' two-wheeler company in terms of unit volume sales in a calendar year. Hero MotoCorp Ltd. continues to maintain this position till date.

History:The story of Hero Honda began with a simple vision - the vision of a mobile and an empowered India, powered by its bikes. Hero MotoCorp Ltd., company's new identity, reflects its commitment towards providing world class mobility solutions with renewed focus on expanding company's footprint in the global arena.

Mission:Hero MotoCorp's mission is to become a global enterprise fulfilling its customers' needs and aspirations for mobility, setting benchmarks in technology, styling and quality so that it converts its customers into its brand advocates. The company will provide an engaging environment for its people to perform to their true potential. It will continue its focus on value creation and enduring relationships with its partners.

Strategy:Hero MotoCorp's key strategies are to build a robust product portfolio across categories, explore growth opportunities globally, continuously improve its operational efficiency, aggressively expand Target & Life-Cycle Costing Page 45

its reach to customers, continue to invest in brand building activities and ensure customer and shareholder delight.

Manufacturing:Hero MotoCorp two wheelers are manufactured across three globally benchmarked manufacturing facilities. Two of these are based at Gurgaon and Dharuhera which are located in the state of Haryana in northern India. The third and the latest manufacturing plant is based at Haridwar, in the hill state of Uttrakhand.

Brand:The new Hero is rising and is poised to shine on the global arena. Company's new identity "Hero MotoCorp Ltd." is truly reflective of its vision to strengthen focus on mobility and technology and creating global footprint. Building and promoting new brand identity will be central to all its initiatives, utilizing every opportunity and leveraging its strong presence across sports, entertainment and ground- level activation.

Distribution:The Company's growth in the two wheeler market in India is the result of an intrinsic ability to increase reach in new geographies and growth markets. Hero MotoCorp's extensive sales and service network now spans over to 5000 customer touch points. These comprise a mix of authorized dealerships, service & spare parts outlets, and dealer-appointed outlets across the country.

Now hero Honda splendour is an established brand in the Indian market. It is a well known bike and also been awarded Bike of the year. Also is has come out with a number of models of splendor bikes to maintain its presence in the market and also the freshness in the bike.

Life Cycle Costing:Now the working cycle or life cycle of a splendor bike is 10,000 working hours for 10 years. Life Cycle Cost = Initial cost at which the product is bought + maintenance cost of its life Cycle Disposal cost

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Now we will calculate the other major costs incurred by the company in making one unit of bike:R&D cost:- Rs 5500 Production cost = Rs 30,000 Marketing cost = Rs 2,000 Distribution cost = Rs 2,400 Now , Maintenance cost is less during initial years because the bike is new and has newly made parts which do not break down easily. And so we take the cost at 3% of the cost. Maintenance cost in the final years is high, as the parts become old, their wear and tear increases and so it reaches upto even 9%. So we take an average of these costs and make it equal to 5% each for simple calculation. Disposal cost is almost 10% of initial cost. So the total life-cycle cost of bike for the company is = Rs 39,900

And the total life cycle cost of bike for the owner of the bikes can be calculated by using the above formula.

Target & Life-Cycle Costing

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