11 terms

Target Costing

STUDY
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Strategic Implications of TG
●Quality - Target costing improves product quality by making it an explicit objective of the product development and costing processes
● Cost - Reducing costs is at the heart of target costing (e.g. target costing does not wait for production to start before managing costs)
● Time - Target costing reduces the time from concept to marketing of products because products and processes are designed simultaneously
Target Costing
is the allowable amount of cost that can be incurred on a product and still earn the required profit from that product.
The Need for Target Costing
CRUD
●Competitive
●Rapidly Changing
●Unforgiving of mistakes or delays
●Demanding
ACES
● Anticipates costs
● Continually improves
● Externally focuses
● Systematically links
TG Key Ideas
1. Price-led costing C=P-TP
2. Customer driven
3. Design
4. Cross-functional product teams
5. Life-cycle costing
6. Value-chain members
The Target Costing Process
Product-Development Cycle:
1. Product Planning
2. Concept Development &
Feasibility Testing
3. Design Development
4. Production

Target Costing Phases:
1. Establishment
2. Attainment
Establishing Target Costs
1. Market Research
2.Competitor Analysis
3.Define Customer & Product Niche
4.Customer Requirements
5. Product Features
6.Market Price
7.Profit Target (ROS)
Target ROS
w1 (historical ROS) + w2 (indurstry ROS) + w3 (Projected ROS)
Management Accounting & Target Costing
1. Life Cycle Costing
2. Value Chain Costing
3. Feature/Function Costing
4. Design Driver Costing
5. Operations Costing
6. Activity-Based Costing
Technical Properties
Decision Relevance
1. How to increase profits and returns
2. How to react to competition
3. What prices to charge for products
4. What features to provide and what specifications to use for those features
5. When to introduce new products and stop building old products
Process Understanding
Target costing can't exist without process orientation
Behavioral Issues
Behaviors needed from management accountants include:
○ Learning how to get involved early and develop a tolerance for ambiguity
○ Communicating with other groups and disciplines
○ Understanding the technical dimensions of the product and
knowing what customers require
There are four main behavioral problems associated with target
costing:
■ Longer development times
■ Employee burnout
■ Market confusion
■ Organizational conflict
Cultural Implications
● Common beliefs and supportive organizational culture
● Customer focus
● Cross-functional cooperation
● Open sharing of information
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