The target costing process is a system of profit planning and cost management that is price led, customer focused, design centred, and crossfunctional. A target price is the estimated price for a product or service that potential customers will be willing to pay. This technique was later adopted by japanese companies too leahy, 1998. Target costing implementation and organizational capabilities. Target costing is a disciplined process that uses data and information in a logical series of steps to determine and achieve a target cost for the product. Target costing and kaizen costing in japanese automobile companies. The steps of implementing target costing by mahmud. Introduction he changes in the business environment in nigeria occasioned by merger. Target costing and kaizen costing in japanese automobile.
The influence of timetomarket and target costing in the new. The results of the analysis showed that there was a statistical significant relationship between target costing technique and annual turnover in ogun industrial metropolis p journal of supply chain management, 421, 26. Multilevel target costing the principles of setting and working according to cost targets are applicable to sublevels as functional systems, individual components and even parts of components. Target costs should include any costs that are driven by the number of units sold. Target costing has a history of more than 40 years in the japanese industry. Ta r get costing can best be described as a systematic process of cost management and profit planning. The main features of target costing are presented below. Target costing is the concept of pricebased costing instead of costbased pricing. C 2 is the slope, it gives the value of cr when target costing increases. However, the findings also showed that there is a strong positive relationship between adoption of target costing and of improvement in return on investment and reduction of cost. Special issue strategic cost management through target costing. Aug 17, 2009 target costing has a history of more than 40 years in the japanese industry. A cost management system is a management control and planning system with the primary objective of producing quality goods and services at the lowest. Target costing and value engineering strategies in.
And the system of target cost was distinguished from other previous cost systems because its activity was not limited to. The results of the analysis showed that there was a statistical significant relationship between target costing technique and annual turnover in ogun industrial metropolis p target costing and lifecycle costing can be regarded as relatively modern advances in management accounting, so it is worth first looking at the approach taken by conventional costing. Ta rget costing in the nhs 04 achieving target costs once the gap has been identified between the target cost and the cost estimate,it is necessary to. Target costing also is a driver for cost improvement as a way to integrate the use of other tools, for instance jit. However, the analysis of the use of tc techniques produced two different factors kmo and cronbachs. International journal of academic research in accounting, finance and management. The company assembles representatives from various.
Born out of the marketdriven philosophy, target costing is based on the pricedown, costdown strategy, which has allowed companies to win considerable share of their respective markets. A dates from the period after the second world war, in a period of severe restraints in terms of resources, when the americans created a concept of maximizing the attributes of a product, a technique called value engineering. Although many manufacturers in japan use target costing, the system used at toyota motor corporation is the oldest and considered by many the most technically advanced. In addition, the price and cost are for specified product functionality, which is determined from understanding the needs of the customer and the willingness of the customer to pay for each function. Target costing is just not costing system or cost management technique but this is a complete business management philosophy that is purely market oriented. Management accounting of costs the canadian center of science. Defining these is the next step in the target costing. Role of cost accountant under target costing the cost accountant can clearly record the costing information from the stage of design creation and up to the stage of selling the product. In target costing and value engineering we finally have the much needed insight into the way in which japanese firms manage costs, the missing piece of the puzzle on how lean enterprises compete. Target costing is a process which starts from the price that the consumer is willing to pay. Simply put, target costing is a process of ascertaining and attaining full stream cost, at which the intended product with specific requirements, must be produced so as to realise the desired profits, at an anticipated selling price over a specified period.
In tandem with global diffusion of tc implementation, some of nonjapanese countries e. But, it is a management technique used to survive under the increasing competitive environment. May 09, 2017 implementation challenges target costing 30 some of the potential problems in implementing a target costing system from a behavioral point of view are. The influence of timetomarket and target costing in the. For example, if the company accepts responsibility for disposing of a product at the end of its useful life, these costs are included in the target. Market prices are used to determine allowableor targetcosts. Target costing process approach, technique formula. Target costing involves a reverse analysis of the product, starting with the selling price.
Introducing new products to existing value stream design to achieve maximum contribution from the value stream. Consistent with the notion of pricebased costing, several authors have argued that target costing is a superior approach to cost reduction and. Pdf target costing is a system of profit planning and cost. To determine how target costing enhance cost advantage in manufacturing firms. The research team selected four companies as having best practices in target costing. Target costing and performance of manufacturing industry in. The implementation of target costing in the united states. Purchasing and supply managements participation in the target costing process. Target costing originated in japan in the 1960s, though it remained a secret for years. The reason is under abc, for each unit, batch or product level activity, a cost driver is identified which. Special issue strategic cost management through target costing a case study of tata nano strategic cost management is an integral part of profit planning and total management of enterprises. Target costing integrates the product design, desired price, desired profit, and desired cost into one process beginning at the product development stage. Nov 09, 2012 however, the starting point is the cost, whereas with target costing the starting point is the selling price and then trying to get the cost down to the target. This research deals with target cost method as one of the strategic management accounting methods, their impact.
International journal of production economics, 1152, 559568. Management circulate quality standards manual to all the employees in the. The first is that many companies have less control over price than they would like to think. The study began with a survey to collect information about target costing throughout the united states. The general objective of the study is to ascertain the impact of target costing on competitive advantage in nigeria manufacturing firms.
Target costing as a strategic tool mit sloan management. Target costing california state university, sacramento. The relationship between target costing method and pricing. However, the starting point is the cost, whereas with target costing the starting point is the selling price and then trying to get the cost down to the target. Pdf integrating target costing and abc researchgate. C 1 is the constant that is the value of cost that can be reduced if target costing is not adopted or considered at all. It involves the discernment of maximum cost to be incurred on a new product, followed by. Faced with increasing global competition, many firms are finding that costbased pricing is becoming a relic of the past, whereas pricebased or target costing is emerging as a key strategic tool. Such companies can achieve reductions in new product development cycle time and cost without compromising quality and functionality.
The target costing initiates cost management at the earliest stages of product development and applies it throughout the product life cycle by actively involving the entire value chain. The company considers the projected price for each unit and its desired profit on the item. Design a product that provides the features and price demanded by customers. Target costing key features, advantages and examples. A target cost is the allowable amount of cost that can be incurred on a product and still earn the required profit from that product. Implementing target costing in small and medium scale. Typically, conventional costing attempts to work out the cost of producing an item incorporating the costs of resources that are currently used or consumed. Target costing is an approach to determine a products lifecycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit. Target costing, although its concept is used throughout the product life cycle, is primarily used and most effective in the product development and design stage.
The slope measures the rate of change in cr for a unit change in tc. Target costing an approach to pricing that integrates the product design, desired price, desired profit, and desired cost into one process beginning at the product development stage. The impact of target cost method to strengthen the. Develop profitable new products with target costing. In their view, combining target and kaizen costing under a single name. Target costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum target cost figure. Target cost, target costing, target profit, managerial accounting. Management requires a profit equal to 60 percent of the selling price. Thailand, china, india, singapore and malaysia have increased their attention towards this approach to maintain their competitiveness.
Considering the variables which compose each extracted factor, factor 1 was named componentlevel tc. The purpose of this study is to explore the role of target costing in managing product costs while promoting quality specifications that will meet customer requirements. The target cost is an accounting method of managing the perspective profits of the company through having target cost in the process of developing the product copper and slagmudler, 2002. Target costs are calculated using a formula similar to the following. Pdf integrating target costing and resource consumption. In 1959, toyota developed the preliminary target costing approach. The adoption and implementation of target costing approach in. Combining target costing with qfd and ve techniques provides companies with a competitive. A price and profit target was set for the car and it was then designed to meet that profit without sacrificing major customer requirements. Fisher, implementing target costing, journal of cost management, volume 9.
Target costing was applied to all product development efforts in the company including the neon, a new small car developed for the lower price range. Conflicts that arise between parties involved in the target costing process, e. A number of companiesprimarily in japan use target costing, including compaq, culp, cummins engine, daihatsu motors, daimlerchrysler, ford, isuzu motors. Furthermore, a target cost model based upon activitybased costing and activitybased budgeting, has been developed. The steps of implementing target costing by mahmud hematfar. Target costing is defined as a disciplined process for determining and achieving a fullstream cost at which a proposed product with specified functionality, performance, and quality must be produced in order to generate the desired profitability at the products anticipated selling price over a specified period of time in the future. It is seen as a process that can significantly improve new product development considering the customer requirement, incorporates earlier supplier involvement and concurrent engineering, utilizes crossfunctional teams. The target costing approach was developed in recognition of two important characteristics of markets and costs. Our study states that target costing method can be realized in conjuction with the activitybased costing method for ensuring the desired efficiency of the target costing method. Target cost means an estimation of total cost to win in the competition in terms of quality, cost and productivity.
The company subtracts the desired profit from the selling price to determine the target cost per unit. In addition, it aims to develop a target costing module that will simplify implementation of target costing especially in small and medium companies smes. Target costing problems role of cost accountant under. In his journal, john c lere 2000 told that abc is a powerful tool for pricing than traditional costing system. Abc is typically applied to products already in production. Special issue strategic cost management through target. Target costing is a technique that predetermines an ideal product cost to maximize profits across that products life cycle. Engineer the product to achieve the target cost from. Pdf target costing is a technique that predetermines an ideal. Target costing is not just a method of costing, but rather a management technique wherein prices are determined by market conditions, taking into account several factors, such as homogeneous products, level of competition, nolow switching costs cost of goods manufactured cogm cost of goods manufactured, also known to as cogm, is a term used. A target cost is the maximum amount of cost that can be incurred on a product, however, the firm can still. Using extensive research of actual lean enterprises, cooper and slagmulder describe the need for american businesses to integrate their total quality. Target costing can be viewed as a proactive cost management tool used to reduce the total cost of the product, over its complete lifecycle, through production, engineering, research and design. Target costing implementation in thailand by kanitsorn.
Ayten ersoy b abstract target costing as a cost management and profit planning system is used by many competitive firms since 1970s. A comparative study of the different costing techniques and their application in the pharmaceutical companies no. International business and accounting research journal. Lastly, target costing may help companies to encourage a focus on the customers. Target costing and lifecycle costing can be regarded as relatively modern advances in management accounting, so it is worth first looking at the approach taken by conventional costing. In simulation, physical items flow through the sequence of.
Target costing become an analysis which highlights other problems that can reveal more general managerial problems. One solution is the combining of two parts of the top the external and the internal bootie. Impact of target costing on competitive advantage in the. Derive the target cost by subtracting the desired profit from step 2 from the desired price from step 1. Although the concept is simple, the implementation needs an. International journal of academic research in accounting, finance and management sciences. A target cost is the estimated longrun cost of a product or service that allows the firm to achieve a targeted profit. The purpose of this study is to explore the role of target costing in managing product costs in thailand. In this study it was found that target costing and reduction of timetomarket together provide considerable advantages to users of these practices. Slagmulder, target costing and value engineering portland, oregon.
At sublevels cost targets are established on the basis of the overall product target cost. Target costing is a formal system that attempts to achieve a target cost. This study examined the ways in which target costing has been applied in variety of industries in the u. Target costing is a contemporary management accounting tool developed. It involves setting a target cost by subtracting a desired profit margin from a competitive market price. Activitybased costing abc an effective tool for better. Function groups index development target costs for functions production phase 1997present product realization phase 199396 concept phase 19921993 use of. It helps the firm in managing the business in reaping profits in. Factor analysis grouped the different measures of success into a single factor kmo and cronbachs. Regarding the globalization of markets and the issue of joining world trade.
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