Target-costing triggers value engineering for Bajaj Auto

Chennai, Dec 9: Bajaj Auto has adopted target costing to bring about far reaching changes in value engineering thereby enabling it to kee...

Chennai, Dec 9: Bajaj Auto has adopted target costing to bring about far reaching changes in value engineering thereby enabling it to keep abreast of competition. Profits are important in any enterprise and where markets determined price, margins had to be tightly fitted in, according to Bajaj Auto’s B. Parthsarathy, deputy general manager ( costing). He defined target costing simply thus: target cost of product = sale price minus desired margin.

The actual price to produce any product having a determined market sales is arrived at from the current processes. Citing an example, he said that the cost of the Bajaj diesel auto was first worked out at Rs 88,000 (using activity-based costing). But the marketing team felt that the market would not buy a diesel auto at that price when competition was selling at Rs 78,000.

So while the sale price was fixed at Rs 78,000, the ex-factory price (excluding registration costs, insurance and excise costs) worked out to Rs 56,000. A margin of Rs 7000 was fixed. Thetarget cost was Rs 49,000.

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Bajaj Auto found that it needed to reduce costs by Rs 5,000 per auto to meet the target cost. This had to be done by improving manufacturing process, substituting/modifying parts without distorting functional value, by ensuring vendor efficiency and other parameters.

As target costs were not allowed to be revised, the company had to work hard to reduce costs without compromising on quality. This resulted in better value engineering and efficient material movements.

According to Parthasarathy, Toyota had practised target costing and so had Chrysler with their neon car – and both had succeeded. Bajaj itself had achieved 50 per cent of this target, but with six months more to go, it is hopeful of achieving the target.

The method however presupposes a certain volume of sales. Also, once target costing is done for the first time, it becomes continuous improvement later on. Target costing is also better applied in totally new products rather than old products, Parthasarathy said.Though Bajaj had not factored advertisement costs, this should also be taken into account, he said.