Cooper, When Lean Enterprises Collide: Competing Through Confrontation Boston: Harvard Business School Press, 1995 , p. Journal of Cost Management Spring : 6-14. The target costing concept has limited application in a services business where labor comprises the primary cost. About the Author Cam Merritt is a writer and editor specializing in business, personal finance and home design. For example, many firms use simulation to study the complex relationship between selling prices and profit margins, the impact of individual product decisions on overall group profitability, the right mix of products to enhance overall profit, or other economic modeling to overcome organizational inertia by getting the most productive reasoning.
However, some factors play a specific role based on what drives a company's approach to target costing. · Engineering target costing-The prime cost system where the direct material and labor cost are used as alternative basis for product pricing and applying target costing ,in this manner avoiding indirect variable and fixed costs allocation complications. Definition Target costing involves a reverse analysis of the product, starting with the selling price. These employees learn about the activities that occur in other departments and how their own actions affect others. Target costing represents a fundamentally different approach. 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. The second most significant opportunity to achieve cost reduction is through consideration of multiple concept and design alternatives for both the product and its manufacturing and support processes at each stage of the development cycle.
Thus, it is necessary to adjust the unachievable allowable cost to an achievable target cost that the cost increase should be reduced with great effort. Frequent redesigns lead to the introduction of new products that have created better benefits to target costing. Characteristics of fixed costs management 2. Target costing begins with identifying customer needs and calculating an acceptable target sales price for the product. This is done by using tools, pull planning and rapid estimating processes. Reasons for the Late Development 8.
Target costing is a more effective approach because it emphasizes efficiency in order to keep costs low. Instead, many firms, realizing the dangers of housing high inventory, turned to Just-In-Time and Material Requirements Planning. With the increased popularity of assembly-oriented industries, Economic Order Quantity analysis, a traditional means of keeping certain amounts of inventory on hand, became less useful. Some customers might decide to buy a guitar from some other company. One of the main differences is related to cost reduction.
It is easier said than done. The question still is, what is target costing? Milestones may occur on specific dates, or when key completion steps are reached in the design process, such as at the end of each design iteration. To determine the right selling price, Gibson has to look at the target cost. Teams often discover inefficiencies in current processes and recommend improvements that increase efficiency and reduce costs. If the price customers are willing to pay for a particular function is less than its cost, the function is a candidate for elimination. Usually, If there is no evidence, it is better to either drop a project or at least shelve it for a short time and then try again, on the belief that new cost reduction methods or less expensive materials will be available in the near future that will make the target cost an achievable one.
These opportunities can be achieved when there is out-of-the-box or creative consideration of alternatives coupled with structured analysis and decision-making methods. Cross-Functional Teams: Manufacturing a product at or below its target cost requires the involvement of people from many different functions in an organisation: market research, sales, design engineering, procurement, production engineering, production scheduling, material handling and cost management. Establishing the target amount by which current costs must be reduced. Advances In Management Accounting 3 : 179-196. If the product designed cannot be produced in the cost range decided, value engineering is used to drive down the product cost to a level, at which target price and margin can be attained.
Nevertheless, all companies share a series of general steps: a. In the automobile industry, the target cost for a new model is decomposed into target costs for each of the elements of the car—down to a target cost for each of the individual parts. Further on in the development cycle as the product and process become more defined, these models are based on industrial engineering or bottom-up estimating techniques. At the end of this process, the team has a good idea of the target price at which it can sell the proposed product with a certain set of features, and how it must alter the price if it drops some features from the product. Notice that in a target costing approach, the price is set first, and then the target product cost is determined. Focus on Product Design: Design engineering is a key element in target costing. The company considers the projected price for each unit and its desired profit on the item.
By estimating the anticipated selling price of a proposed product and by subtracting the desired profit margin, a company can establish its target cost. The management team should explore other tools like value engineering and quality function deployment. Journal of Management Accounting Research. The models need to be comprehensive to address all of the proposed materials, fabrication processes, and assembly process and need to be validated to insure reasonable accuracy. Following by identify the cost drivers to measure the activity used by cost objects and allocate them to cost driver.