Contemporary times are characterized by quick, dynamic, and continuing changes in the
economy. Therefore, companies have to adapt flexibly and innovatively to these
changes in order to stay competitive and cope with the increasing pressure of competition.
In particular, Asian and East-European competitors gain market share by offering
products of better quality than in earlier times and for lower costs. Under these conditions,
costs represent a fundamental factor for the success of western companies. Accordingly,
management and employees have to fully exploit the potential that cost management
and reduction measures offer. However, costs are not the only buying decision
criterion. Customers expect products with high quality but for a low or moderate price.
Correspondingly, companies have to adjust their new product developments and production
systems to market requirements. This can be achieved by the Target Costing
approach, a tool that is applied in more and more companies.
Therefore, the aim of this essay is to explain the goals and method of Target Costing. It
starts with giving some background information about Target Costing and its historical
development. Chapter three describes the goals of Target Costing. Then, the Target
Costing process is explained in detail. Finally, this essay concludes by discussing that
Target Costing is an effective cost management tool for developing new products according
to market requirements.
[...]
Table of Contents
1 Introduction
2 Basic ideas and historical development of Target Costing
2.1 Definition of Target Costing
2.2 Historical development
2.3 Areas of application
2.4 Separation from regular cost accounting
3 Goals of Target Costing
4 Target Costing process
4.1 Market information as basis for Target Costing
4.2 Definition of target costs
4.3 Splitting of target costs
4.4 Achievement of target costs
5 Conclusion
Objectives and Themes
The primary objective of this essay is to provide a comprehensive explanation of the Target Costing approach, focusing on its goals, methodologies, and strategic application in cost management. The research explores how Target Costing serves as a market-oriented tool to influence costs during the early stages of product development.
- The foundational theory and historical evolution of Target Costing.
- Strategic goals and organizational alignment with market requirements.
- The structured process: defining, splitting, and achieving target costs.
- Distinction between Target Costing and traditional cost accounting systems.
- Practical techniques for cost management and component-level optimization.
Excerpt from the Book
2.4 Separation from regular cost accounting
The translation “Target Costing” for the original Japanese term “Genka Kikaku” is sometimes misleading. Therefore, it is important to highlight that Target Costing is a concept of cost management rather than a costing system like full costing or activity-based costing (Arnaout, 2001; Everaert, 2006). Target Costing is independent from corporate cost accounting as it defines its objectives by utilising market information. In order to clearly display the difference between Target Costing and cost accounting, Meyer (2003) mentions the different planning horizons that facilitate diverse possibilities for planning. Accordingly, he points out that information provided by cost accounting can be used for planning and control of short-term product-related period costs due to the fact that this information is prepared for past or future accounting periods. In contrast, the planning horizon of Target Costing is determined by the end of the product life cycle and therefore may cover many accounting periods. Hence, Target Costing can be characterised as “a concept for medium to long-term cost planning and control” (p. 136). Moreover, information in Target Costing is provided less frequently compared to costing systems; typically, this occurs only when a specific milestone is reached.
Secondly, Meyer depicts the differences between Target Costing and cost accounting in the recognition of “cost units”. In decision-oriented costing systems, cost units are marketable products that are completely determined in terms of their features whereas in Target Costing, a product is already considered as a cost unit when it is in the first stages of development.
Finally, Meyer discusses diversity regarding the type of cost control. He argues that cost control in decision-oriented cost accounting is carried out by comparing the periodical actual cost with the budgeted cost for the specific period (variance analysis). This can be recognized as some kind of “reactive control” (Meyer, 2003, p. 137). However, Target Costing can be considered as “anticipatory control” (Meyer, 2003, p. 138) because it checks costs before they have occurred.
Summary of Chapters
1 Introduction: This chapter introduces the economic necessity for flexible, market-oriented cost management and outlines the essay's aim to explain the Target Costing approach.
2 Basic ideas and historical development of Target Costing: This section defines the concept, traces its Japanese origins and earlier examples, outlines its application areas, and distinguishes it from traditional accounting.
3 Goals of Target Costing: This chapter details the primary objectives of the approach, such as market-oriented alignment, cost influence in development stages, and improved profitability.
4 Target Costing process: This chapter provides a detailed analysis of the three core steps—market information integration, definition of target costs, and the splitting and achievement of those costs.
5 Conclusion: This section summarizes the findings, reiterating that Target Costing is an essential tool for competitive product development, and suggests potential for future research in service sectors.
Keywords
Target Costing, Cost Management, Market Orientation, Product Development, Allowable Costs, Drifting Costs, Component Allocation, Function-oriented Method, Value Control, Competitive Advantage, Profitability, Cost Planning, Strategic Management, Cost Reduction, Anticipatory Control
Frequently Asked Questions
What is the core focus of this work?
This work focuses on the Target Costing approach, examining it as a strategic cost management tool that aligns product design with market-driven cost requirements rather than traditional internal cost accounting.
What are the central themes of the document?
The central themes include the historical development of the method, the distinction between Target Costing and traditional costing, the three-phase process of target cost implementation, and the organizational requirements for its success.
What is the primary goal of the Target Costing process?
The primary goal is to manage and reduce product costs in the early stages of development to ensure a product is both competitive in the market and profitable for the company.
Which scientific methodology is utilized?
The paper utilizes a literature-based conceptual analysis, synthesizing definitions and models from established management accounting researchers such as Horváth, Meyer, and Dinger to explain the Target Costing framework.
What topics are covered in the main section?
The main section covers the definition and history of the method, its specific application areas, the detailed three-step process of defining, splitting, and achieving target costs, and the instruments used to execute these measures.
How would you characterize the keywords of this work?
The keywords reflect a blend of strategic financial management and product development, emphasizing market orientation and the technical aspects of cost allocation and reduction.
What is the difference between "allowable costs" and "drifting costs"?
Allowable costs are the maximum costs permitted by the market to achieve a desired profit, whereas drifting costs represent the estimated costs based on current, existing technologies and processes.
How does the "function-oriented method" differ from the "component allocation method"?
The component allocation method assigns costs based on the proportion of current costs of existing parts, while the function-oriented method links costs to the specific value or benefit that functions contribute to satisfying customer needs.
- Quote paper
- Hendrik Vedder (Author), 2007, The Target Costing Approach, Munich, GRIN Verlag, https://www.grin.com/document/119311
