The Moonglow Electronics Company (a fictitious name for an actual North American company) is a rapidly growing manufacturer of sophisticated electronic equipment for industrial application. Moonglow has analyzed the price, cost, and volume history of some of their key products. Looking more specifically at four products introduced over the last three years, the company found that prices were usually above what they projected by 13%, while costs were up by 65%. Senior Moonglow financial management, with the full support of the CEO, has concluded that a target costing initiative focused on both new and existing products should be introduced throughout the company.

It was agreed by Moonglow management that cost management would have to receive much greater attention “every step of the way” in the development process. During product planning (marketing), as a part of product definition, the product’s selling price, projected volume, and initial “target” cost would be determined. In concept design, rough cost estimates would be assessed and assigned to component or functional blocks. By general design and prototype development, more rough cost estimates would be made to assess whether the target cost could still be achieved. Similarly, in detail design (drawings and specifications) and manufacturing system design (processes, tooling, etc.) detailed cost estimates would continue to be made to assure that the target cost could be met. During each and every step of the development cycle, cost estimates would be made to assure that the target cost was attainable.

● Plan price and cost reductions;
● Develop a formal “estimated cost system”;
● Demand “estimated cost reviews” at each step;
● Continue to develop “team” approach to new product development;
● Measure and learn from experience;
● Develop “value engineering” skills and process throughout the