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The Use of Target Costing In Developing the Mercedes-Benz M-

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Sohaib Khader

on 7 October 2013

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Transcript of The Use of Target Costing In Developing the Mercedes-Benz M-

Target Costing

The Use of Target Costing In Developing the Mercedes-Benz M-Class
Author: Tom Albright

Presented by:
Sohaib Khader

ACCT 4720
October 8, 2013
Target Costing Systems
Consist of three major characteristics
Target Costing Success
M-Class & Target Costing
How did Mercedes-Benz use target costing in the design & production of the M-class Model?
Price-led Costing
Pricing as a function of cost

Customer rejection leads to margin reduction

Selling prices as uncontrollable variables
Customer Orientation
Products customers want at price willing to pay

Price, Quality, Functionality

Short-term competitive advantage
Focus on Product & Process Design
Design phase decisions

Cost-reduction efforts focused on before production

Reduce level of value-added activities
Concept Phase (1992-1993)
Rapidly expanding markets for utility vehicles

Cross-functional teams conducted research

Rough cost estimate was developed

Risks and opportunities
Use of customer focus groups

Maintained quality standards

Produce a vehicle customers want

Goal-oriented approach
Product Realization Phase (1993-96)
Production Phase
Monitored by annual NPV analysis

Meetings held in Germany

Actual cost performance vs standards developed
Brief Background

Target Costing

Mercedes Benz & Target Costing


Mercedes Benz introduces new M-Class division

Use of target costing strategy to design new class

Create a vehicle that customers want and are willing to pay for

Global penetration
1. Targets set in advance

2. Majority of costs identified early

3. Multifunctional
what determines successful target costing?
Cross-functional Teams
Wide variety of professional expertise

Enhance quality and control costs

Cost planners, Design engineers, etc.
Life-Cycle Cost Reduction
Costs extending beyond mfg stage

Minimize ownership costs to customers

ex. Mercedes E300 Diesel
Value Chain Involvement
Involving "upstream" suppliers

Involving "downstream" input
Function Groups
Mercedes divided the M-class into function groups

Use of high-value-added systems suppliers

Higher quality, shorter development time
Index Development
Target Costs for Functions
Use of various indexes to determine cost relationships

Relied on customer feedback & research to determine indexes
Function groups were identified with target costs estimates

Linking consumer preferences with engineering components

Determining target cost index
Successful target costing at MB lead to the production of 80,000 vehicles

Streamlined management structure
The pros and cons of Target Costing
Customer driven
Costs identified early
Less risk
Improved customer satisfaction
Length of development cycle
Difficult to implement
The cost incurred may be different leading to under or over costing
Why Target Costing?
Global competition with mobile capital
Technology leadership no longer provides lasting competitive edge
Pressure for lower prices
Shorter product life cycles
Demand for custom products
Global competitiveness requires balancing
Target costing focuses on all 3 dimensions
A target cost is the allowable amount of cost that can be incurred on a product and still earn profit on that product
Full transcript