CHAPTER 3 - Educators

104 CHAPTER 3/COST-ESTIMATION TECHNIQUES
total direct labor requirements are reduced to 34.48 hours (instead of 36.48), the
target cost could be realized. Now the challenge is to find a way, either through
product or process redesign, to reduce the direct labor requirements.
EXAMPLE 3-11 Cost Goal for Production Material at the Throttle Assembly Plant
Given the current estimated total manufacturing cost of $26.21, as shown in
Figure 3-8, determine a cost goal for production material that would allow us to
achieve a target cost of $25.00.
Solution
With the spreadsheet in Figure 3-8 as a starting point, one approach to
determining a cost goal for production material would be to iteratively change
the value entered in Row G and Column D until the desired total manufacturing
cost of $25.00 is obtained. The following table shows a series of costs for
production material and the resulting total manufacturing cost per assembly:
Production Material Total Manufacturing
Cost per 50 Assemblies ($) Cost per Assembly ($)
167.17 26.21
150.00 25.84
140.00 25.63
130.00 25.42
120.00 25.21
110.00 25.00
As seen in the table, a production material cost of $110 per batch of 50 assemblies
would result in a total manufacturing cost of $25.00, the target cost. Now it is
left to design engineers to determine if a different, less costly material could be
used or if process improvements could be made to reduce material scrap. Other
possibilities would be to negotiate a new purchase price with the supplier of the
material or seek a new supplier.
The chapter case study on the demanufacturing of computers illustrates the
versatility of target costing concepts.
3.5.3 Value Engineering
This section introduces the topic of value engineering (VE). The objective of
VE is very similar to that of design to cost. The VE objective is to provide
the required product functions at a minimum cost. VE necessitates a detailed
examination of a product’s functions, and the cost of each, in addition to a