CHAPTER 3 - Educators

100 CHAPTER 3/COST-ESTIMATION TECHNIQUES
Figure 3-8 Manufacturing Cost-Estimating Spreadsheet
$167.17. A direct estimate of $28.00 applies to the outside manufacture of required
components. The subtotal of cost elements at this point is $1,235.62.
Packing costs are estimated as 5% of all previous costs (row I), giving a total
direct charge of $1,297.41. The cost of other miscellaneous direct charges are figured
in as 1% of the current subtotal (row K). This results in a total manufacturing cost
of $1,310.38 for the entire lot of 50 throttle assemblies. The manufacturing cost per
assembly is $1,310.38/50 = $26.21.
The price of a product is based on the overall cost of making the item plus a
built-in profit. The bottom of the spreadsheet in Figure 3-8 shows the computation
of unit selling price based on this strategy. In this example, the desired profit (often
called the profit margin) is 10% of the unit manufacturing cost, which corresponds
to a profit of $2.62 per throttle assembly. The total selling price of a throttle assembly
is then $26.21 + $2.62 = $28.83.
3.5.2 Target Costing and Design to Cost:
A “Top-Down” Approach
Traditionally, American firms determine an initial estimate of a new product’s
selling price by using the bottom-up approach described in the previous section.
That is, the estimated selling price is obtained by accumulating relevant fixed and
variable costs and then adding a profit margin, which is a percentage of total
manufacturing costs. This process is often termed design to price. The estimated
selling price is then used by the marketing department to determine whether the
new product can be sold.
In contrast, Japanese firms apply the concept of target costing, which is a topdown
approach. The focus of target costing is “what should the product cost” instead
of “what does the product cost.” The objective of target costing is to design costs