Target Costing Accounts

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1. Acknowledgement2. Preface

3. Introduction4. The Process of Implementation - Target Costing into a New Product

5. Establishing a Target Profit for the Product6. Establishing a Selling Price for the Product7. Market Driven Selling Price - Desired Profit = Target Cost8. Determine the Target Cost9. Perform Functional Cost Analysis and/or Value Engineering10.Determine the Cost Estimate11.Decision: is the Cost Estimate on Target?12.Make the Final Decision13.Achieving the Best Target Cost Possible14.Which Type of Company Would Benefit From Target Costing?15.Additional Factors Which Promote the Usefulness of Target Costing

16. Target costing tools and examples

17.Target costing case study

18.Bibliography

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With deep sense of pleasure and satisfaction we

have completed this project on Target Costing.We would like to extend our heartfelt thanks to

Mr.Hamendra Kumar Poswal, Faculty College of

business studies, whose invaluable guidance

became a tremendous source of inspiration and

helped us in completing the project.

Lastly we thank all those who have directly orindirectly helped us in accomplishing this task.We hope that through our efforts you are able toget a glimpse of target costing in the bestpossible manner.



In management accounting, cost accounting establishes budget and

actual cost of operations, processes, departments or product and the

analysis of variances, profitability or social use of funds. Managers use

cost accounting to support decision making to cut a

company's costs and improve profitability

Target costing is a pricing method used by firms. It is defined as "a cost

management tool for reducing the overall cost of a product over its

entire life-cycle with the help of production, engineering, research and

design". A target cost is the maximum amount of cost that can be

incurred on a product and with it the firm can still earn the required profit

margin from that product at a particular selling price.

In the traditional cost-plus pricing method materials, labor and overhead

costs are measured and a desired profit is added to determine the

selling price.

Through this assignment we have tried to provide you with the best

information on the topic.

http://en.wikipedia.org/wiki/Management_accounting

http://en.wikipedia.org/wiki/Cost

http://en.wikipedia.org/wiki/Profit_(accounting)

http://en.wikipedia.org/wiki/Pricing

http://en.wikipedia.org/wiki/Product_life_cycle

http://en.wikipedia.org/wiki/Profit_margin


http://en.wikipedia.org/wiki/Cost-plus_pricing

http://en.wikipedia.org/wiki/Management_accounting

http://en.wikipedia.org/wiki/Cost

http://en.wikipedia.org/wiki/Profit_(accounting)

http://en.wikipedia.org/wiki/Pricing

http://en.wikipedia.org/wiki/Product_life_cycle



http://en.wikipedia.org/wiki/Cost-plus_pricing



TARGET COSTING

Introduction Target costing involves setting a target cost by subtracting a desiredprofit margin from a competitive market price.

A lengthy but complete definition is "Target Costing is a disciplinedprocess for determining and achieving a full-stream cost at which aproposed product with specified functionality, performance, and qualitymust be produced in order to generate the desired profitability at theproduct’s anticipated selling price over a specified period of time in thefuture." As a totally new product and its industry develops, it starts tocompete based on its new technology, concept, and/or service.Competitors emerge and the basis for competition evolves to other areassuch as cycle time, quality, or reliability. As an industry becomes mature,the basis of competition typically moves to price. Profit margins shrink.Companies begin focusing on cost reduction. However, the cost structurefor existing products is largely locked in and cost reduction activities have

limited impact. As companies begin to realize that the majority of aproduct's costs are committed based on decisions made during thedevelopment of a product, the focus shifts to actions that can be takenduring the product development phase.

Until recently, engineers have focused on satisfying a customer'srequirements. Most development personnel have viewed a product's costas a dependent variable that is the result of the decisions made about aproducts functions, features and performance capabilities. Because aproduct's costs are often not assessed until later in the developmentcycle, it is common for product costs to be higher than desired. This

process is represented in Figure 1.



Target costing represents a fundamentally different approach. It is based onthree premises:

1.) Orienting products to customer affordability or market-driven pricing,

2.) Treating product cost as an independent variable during the definition of aproduct's requirements,

3.) Proactively working to achieve target cost during product and processdevelopment. This target costing approach is represented in Figure 2.

Target costing builds upon a design-to-cost (DTC) approach with the focus onmarket-driven target prices as a basis for establishing target costs. The targetcosting concept is similar to the cost as an independent variable (CAIV) approachused by the U.S. Department of Defense and to the price-to-win philosophy usedby a number of companies pursuing contracts involving development undercontract.



Target cost management (history)

CAM-I (Consortium for Advanced Manufacturing – International) was established1972 as an international non-profit-organization to carry out research andscholarship on management and manufacturing technology systems. CAM-I haslaunched an extensive study labeled as target cost management (TCM). The CAM-Istudy group made the following conclusions concerning the major changes needed:

• An overall management system is required to set the targets and to channelthe decisions of all those involved in product definition and developmenttowards wider corporate goals.

• Product management must widen to incorporate both physical and serviceattributes measured in terms of customer value.

• Cost management must shift its focus from accounting for the sake of accounting to enable expenditures to be used as a planning tool for creativeproduct and process design.

• Product profitability must be assessed and planned in the context of acomprehensive life cycle and the relationship of a broad market value chain.(CAM-I TCM Study Group statements 1994.)

The following quotations have been taken from a state-of-the-art review about targetcosting. Target costing is a cost management concept that has been developed andpracticed in Japanese companies since the 1970s and has been described inEnglish mainly by Japanese authors. Target costing is built on a comprehensive set

of cost planning, cost management and cost control instruments which are aimedprimarily at the early stages of product and process design in order to influenceproduct cost structures resulting from the market-derived requirements. The targetcosting process requires the cost orients coordination of all product related functions.(Horváth 1993.)

Japanese management accounting uses classification of predetermined and actual c osts. Predetermined costs are the expected measures of the cost beforeproduction, while actual costs are calculated after production. Predetermined costs are divided into standard costs and estimated costs. Standard costs depend onstatistical data and are utilized as an index for cost management. Estimated costsdepend on the managers’ past experience or intuition (Makido 1992).

Target costing, as it has been developed in Japan, was invented by Toyota in 1965.Thus, the use of target costing has a long tradition at Toyota. At Toyota, they talkabout cost planning and cost control, i.e. influencing product costs during thedesign phase and keeping the running costs as low as possible. Reducing costthrough continuous improvement, “cost kaizen”, is becoming relatively lessimportant, because the efforts made throughout the company will inevitably lead tofewer opportunities to cut costs. (Tanaka T 1993.)

For example, the lifetime target profit P s of a new model (e.g. Celica) is calculated asfollows:



P s = P % * S a

where P % is the profit ratio of sales and

S a is the target sales.

The sales target is calculated using the retail price

S a = U s * Qs

where

U s is the target retail price and

Qs is the target production volume over the product’s life.

Tanaka M (1989) claims that 80-90% of the life cycle cost is determined at thedesign phase of the product. Therefore, the present cost control system is focusedon the design phase. The system consists of five stages: planning, concept design,basic design and manufacturing preparation.

The Process of Implementation - Target Costing into a NewProduct The target costing approach brings the management accountant into theprocess at the early planning stage. The management accountant iscontributing to the early decisions—

Should the company be making this kind of product?What constraints need to be applied in the design stage?Is the market demand consistent with our projections?Can we achieve the determined return in this competitive of a market?

Market Driven Selling Price - Desired Profit = Target CostIn the target costing model and opposed to the traditional method of costing, costs are not the driver rather they are driven. The market setsthe price, management sets the profit margin, and the differencebecomes the allowable cost—cost defined and constrained by pricerealities and profit goals. New and increasingly necessary, target costingabides to the following logical flow and procedures:



Establishing a Selling Price for the Product The target costing process begins by establishing a selling price, based onmarket research, for the new product. From this target-selling price, thedesired (target) profit is subtracted to determine the target cost. In alllikelihood, this target is below the company’s current manufacturing cost.

Teams from many departments then perform functional cost analysis inan attempt to reduce costs to a level in the acceptable range. If thecurrent cost estimate is at the target, the firm must decide whether or notto introduce the new product.If the current cost estimate is above the target, functional cost analysis isused to make changes and prepare another cost estimate.

Establishing a Target Profit for the ProductMarketing plays a crucial role in the determination of the target cost. Thestarting point for a target cost is the estimated selling price for theproduct determined by market analysis. Sales volume is also estimatedand, from the total estimated sales revenue, the desired profit issubtracted. Management determines this desired profit margin inreference to the company’s long-term strategy. Retail prices and salesvolumes are proposed by the marketing function based on its researchand the company’s desired market share. Total sales revenue for eachnew product over its life can now be estimated. The target profit, usuallydetermined by using return on sales, is subtracted from the total salesrevenue. The target cost is now determined.

Determine the Target Cost

The target profit is subtracted from the target price to arrive at the targetcost. Management accounting can play an important role in effectivelydetermining target profits and target costs. Accountants can supply theinformation required to support marketing analysis for a new product andrelate it to existing products. After the target cost is determined bysubtracting the target profit from the target price, functional cost analysisis used to achieve the target cost. Functional cost analysis is a groupactivity typically involving employees from different departments (such asmarketing, design, engineering, production, purchasing, and accounting)and is aimed at proposing alternatives for reducing overall product cost. This team-oriented approach requires that the employees of different

departments bring together their knowledge and experience in theorganisation to contribute to the cost reduction process. Working withproduct designers, their motivation is not only to cut the number of partsbut also to work toward the use of standard parts in designs that giveproducts desired functions at a lower cost.

Perform Functional Cost Analysis and/or Value EngineeringFunctional cost analysis requires the preparation of a logical diagram foreach function of the product. It should be noted that this is not a diagramof each part of the product since it is the functions of a product thatdetermine its success in the market. Each function and sub-function of theproduct is defined to show the various operations of the product.



Functional analysis is closely linked to value engineering. Functionalanalysis is a cost management system that focuses on the variousfunctions of each product. The individual functions of a product becomethe set of cost objectives and provide the basis for the costing system.Value Engineering (VE) involves designing a product from different angles

at a lower cost by reviewing the functions needed by customers. VE isused for purchasing, planning, design, production, and other processes ona company-wide basis. There are a variety of methods for conductingvalue engineering. The process generally starts with performance checkson test parts. Designs are changed to give each part a specific degree of performance. Then discussion turns to ways to cut costs while maintainingperformance. The aim is to use the information provided by the functional analysis topropose alternatives for improving costs.

Determine the Cost EstimateFunctional analysis requires information concerning engineeringspecifications and accounting data. The actual manufacturing and thetarget cost for each product’s functions are compared. Alternatives areidentified to bring each function’s actual cost estimate to its target cost.Management accountants provide information on the cost effects of theproposed functional modifications. When needed, they prepare verydetailed sets of cost tables that include the costs of alternative materials,of using different types of manufacturing technologies, and so on.

Decision: is the Cost Estimate on Target?

After the team consisting of members from the various functions of thecompany have used value engineering (as discussed in the followingsection) and functional cost analysis to determine the new product’sestimated cost, the estimate is compared with the target cost.If the cost estimate exceeds the target cost, functional cost analysis isused again to reduce the estimated cost to the target cost.It must be understood that this is not always a ‘yes/no’ decision model.Although functional analysis is performed to determine if the product canbe produced for less than the target cost, often product introductions areaccepted when the initial review has the actual cost exceeding the target. This subjective approach is taken when it can be determined that, overthe life of the product, the firm will be able to produce it for less thancurrently possible, and less than the target cost.

Make the Final DecisionOnce the cost estimates are on target, management makes the finaldecision to introduce the product based on manufacturing feasibility,market needs and consumer acceptability.If the decision is to go ahead with the product, manufacturing is instructedto proceed with production.Once the decision has been made to manufacture the new product, there

are other considerations necessary for successful implementation of theprocess. Since the target cost is often below the actual cost based on the



current production technology, a team effort is required to enable theorganisation to achieve the target cost. Teams of people from marketing,engineering, purchasing, manufacturing, and accounting work together toassure that a cost position on the product is such that the company cansell the product at its required market price to insure the desired target

return on the product.Finally, target costing does not end once the decision has been made tomove the product into the production stage. The standard manufacturingcost of the product depends on specific production line conditions. Forexample, production on lines below capacity pushes costs up, whileproduction on lines near full capacity leads to the best-cost performance.Often during the planning stage, it is difficult to visualise the lineconditions and thus reflect accurately these conditions in cost estimates. Therefore, once the initial target cost has been calculated, themanufacturing division then initiates an effort to improve on the standardcost, in order to get it down to the target cost.

Achieving the Best Target Cost PossiblePotential world-class manufacturers have the resources available to leadthe way in working towards the lowest target cost. Target costs can onlybe achieved and eventually improved upon when more people areinvolved in the design improvement process and work to further refine theresponsible design engineer’s best effort. To achieve the best target costspossible, these practical guidelines should be followed:Do not spend man-years developing the ultimate product costs. Rather,allocate time to simply estimating or prorating these costs;

Ensure that each component and assembly design is reviewed by a crossfunctional group of managers. The intent of this review is not to design bycommittee but to generate new ideas on how the design engineer canachieve the target cost;Provide the appropriate checks and balances within your product designdepartment. Do not have the original engineer try to improve upon hisproduct, assign a design engineer other than the original designer toimprove the design;Assign responsibility for pursuing cost opportunities to the specific groupmembers according to their own areas of expertise.

The following ten steps are required to install a comprehensivetarget costing approach within an organization.

1. Re-orient culture and attitudes. The first and most challengingstep is re-orient thinking toward market-driven pricing andprioritized customer needs rather than just technical requirementsas a basis for product development. This is a fundamental changefrom the attitude in most organizations where cost is the result of the design rather than the influencer of the design and that pricingis derived from building up a estimate of the cost of manufacturinga product.



2. Establish a market-driven target price. A target price needs tobe established based upon market factors such as the companyposition in the market place (market share), business and marketpenetration strategy, competition and competitive price response,targeted market niche or price point, and elasticity of demand. If the

company is responding to a request for proposal/quotation, thetarget price is based on analysis of the price to win consideringcustomer affordability and competitive analysis.

3. Determine the target cost. Once the target price is established, aworksheet (see example below) is used to calculate the target costby subtracting the standard profit margin, warranty reserves, andany uncontrollable corporate allocations. If a bid includes non-recurring development costs, these are also subtracted. The targetcost is allocated down to lower level assemblies of subsystems in amanner consistent with the structure of teams or individual designer

responsibilities.

4. Balance target cost with requirements. Before the target costis finalized, it must be considered in conjunction with productrequirements. The greatest opportunity to control a product's costsis through proper setting of requirements or specifications. Thisrequires a careful understanding of the voice of the customer, use of conjoint analysis to understand the value that customers place onparticular product capabilities, and use of techniques such as qualityfunction deployment to help make these trade-off’s among various

product requirements including target cost.

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5. Establish a target costing process and a team-basedorganization. A well-defined process is required that integratesactivities and tasks to support to support target costing. Thisprocess needs to be based on early and proactive consideration of target costs and incorporate tools and methodologies described

subsequently. Further, a team-based organization is required thatintegrates essential disciplines such as marketing, engineering,manufacturing, purchasing, and finance. Responsibilities to supporttarget costing need to be clearly defined.

6. Brainstorm and analyze alternatives. The second mostsignificant opportunity to achieve cost reduction is throughconsideration of multiple concept and design alternatives for boththe product and its manufacturing and support processes at eachstage of the development cycle. These opportunities can beachieved when there is out-of-the-box or creative consideration of

alternatives coupled with structured analysis and decision-makingmethods.

7. Establish product cost models to support decision-making. Product cost models and cost tables provide the tools toevaluate the implications of concept and design alternatives. In theearly stages of development, these models are based on parametricestimating or analogy techniques. Further on in the developmentcycle as the product and process become more defined, thesemodels are based on industrial engineering or bottom-up estimatingtechniques. The models need to be comprehensive to address all of

the proposed materials, fabrication processes, and assemblyprocess and need to be validated to insure reasonable accuracy.A target cost worksheet can be used to capture the variouselements of product cost, compare alternatives, as well as trackchanging estimates against target cost over the development cycle.

8. Use tools to reduce costs. Use of tools and methodologiesrelated to design for manufacturability and assembly, design forinspection and test, modularity and part standardization, and valueanalysis or function analysis. These methodologies will consist of guidelines, databases, training, procedures, and supporting analytictools.

9. Reduce indirect cost application. Since a significant portion of aproduct's costs (typically 30-50%) are indirect, these costs mustalso be addressed. The enterprise must examine these costs, re-engineer indirect business processes, and minimize non-value-added costs. But in addition to these steps, development personnelgenerally lack an understanding of the relationship of these costs tothe product and process design decisions that they make. Use of activity-based costing and an understanding of the organization'scost drivers can provide a basis for understanding how designdecisions impact indirect costs and, as a result, allow their

avoidance.

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http://www.npd-solutions.com/dfm.html

http://www.npd-solutions.com/va.html


http://www.npd-solutions.com/tcwsexample.html

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10.Measure results and maintain management focus. Currentestimated costs need to be tracked against target cost throughoutdevelopment and the rate of closure monitored. Management needsto focus attention of target cost achievement during design reviewsand phase-gate reviews to communicate the importance of target

costing to the organization

Target costing as an outsourcing techniquesA widely diffuse cost management method used by consultant firms is the Target Costing (TC). Using the TC method consultants aim at designingproducts that satisfy both consumers (with specific product functionalityand quality) and achieve the target cost resulting from the combination of costs of semi-processed products, components, and services. The TC

process is a system of profit planning and cost management that is priceled, customer focused, design centred and cross functional. It can start atthe earliest stage of product development and can be applied throughoutthe product life cycle by actively referring to the whole value chain. Thetwo main relevant phases of TC consist in the consumer orientationrealised on the basis of the market, and in the development of newproduct, in which its life cycle and the value chain are analyzed in cross-functional teams. In order to achieve this cost reduction, differenttechniques are deployed throughout the firm, and members of a crossfunctional team have to work together in order to design products that atthe same time satisfy consumers and achieve the target cost resulting

from the combination of semi-processed products, components, andservices [Sakurai, 1989; Cooper, 2002]. In other words:

"[…] target costing is not a cost quantification technique, but rather acomplete cost reduction program, starting even before the first drawingsof the product have been prepared. It is an approach aimed at reducingthe cost of new products throughout their lifecycle, while meetingconsumer requirements in terms of quality and reliability among others,examining all conceivable ideas relating to cost reduction at the planning,development and prototyping stage. Target costing is not a simple cost

reduction technique, but a complete, strategic profit management system" [Kato, 1993].

In this practice knowledge about strategies, products, functionalities,should be trustfully shared, in a multidisciplinary and cross functionalteam. Even if the team members work using various tools (such as ValueEngineering, Variety Reduction Program, cost table, Quality FunctionDeployment, Design For Manufacturing and Assembly [Monden andSakurai, 1989; Akao, 1989; Yoshikawa and Innes, Mitchell, 1989; Yoshikawa, Innes and Mitchell, 1990; Koudate and Suzue, 1990; Gerthardt,Hutchinson and Mistry, 1991]) people need to share perspectives, create a

common agreement and an understanding of promising combination of products, sustaining innovation. These significant issues are even more



important if the cost management processes are in outsourcing. In thiscase outsource and outsourcers should share knowledge and strategicvision on products and services functionalities and characteristics. Therefore a new knowledge based approach aiming at analyzing theseprocesses should be introduced.

Which Type of Company Would Benefit From TargetCosting?Whenever a new and innovative approach to doing business is discovered,the question arises as to which clients and potential clients might thismethodology provide an appropriate fit. In addition, and consistent withmany new financial or operational approaches, target costing may not befor everyone. Some companies, which seem to benefit most from targetcosting, are those, which maintain the following criteria:Assembly-oriented industries, as opposed to repetitive-process industriesthat produce homogeneous products;Involved heavily with the diversification of the product lines;

Use technologies of factory automation, including computer-aided design,flexible manufacturing systems, office automation, and computer-aidedmanufacturing;Have experienced shorter product life cycles where the pay-back forfactory automation typically must be achieved in less than eight years;Must develop systems for reducing costs during the planning, design anddevelopment stages of a product’s life cycle;Are implementing management methods such as just-in-time, valueengineering, and total quality control

Additional Factors Which Promote the Usefulness of Target Costing The above listing is not completely exhaustive as a variety of factors areat work to promote the usefulness of target costing in other companies.First, products are experiencing shortening life cycles, so the designphase of a product is critical to managing costs.Manufacturing costs are driven primarily by the characteristics of theproducts and the process used to manufacture them. Manufacturingprocesses are determined by the nature of the product and the expectedvolume to be produced. Therefore, to a great extent, costs are determinedin the design stage.Another factor which encourages the use of target costing is productdiversity. The types of products manufactured by companies have



increased rapidly in recent years. Target costing, in both the design andproduction stages, helps manage costs effectively.However, applying target costing in the design stage has the greatest costreduction potential and bottom-line impact.

Target costing tools and examples

Product Development Toolkit

• Bill of Materials and Supplier Plan. The Bill of MaterialWorksheet provides a flexible tool to develop a preliminaryengineering bill of material. It provides single and multiple levelviews and maintains a variety of related information. Items arecoded as make, buy or standard and buy items can be automaticallymoved to the Supplier Plan to aid and track sourcing decisions. TheBill of Material Worksheet also includes integrated cost roll-up

capabilities and comparison to target costs.

• Control Plan. Control Plans aid in the manufacture of qualityproducts to meet customer requirements. The Control Plan providea written description of the process and quality controls to assure anacceptable product and to minimize product and process variation.

• Design for Manufacturability & Assembly Evaluation. Designfor Assembly (DFA) refers to the principles of designing products sothat they are more manufacturable. The DFA Assessment Worksheetprovides a simple to use assessment methodology to evaluate

concepts and designs early in the development process beforesufficient information may be available to use more formal DFM/Aanalysis software or companies that don't want to make a moresignificant investment in DFA software.

• Design for Manufacturability Guidelines. Designs forManufacturability/Assembly Checklist/Guidelines are included to aiddesigners develop producible designs. These checklists/guidelinescan be adapted to the company's specific product and processrequirements. The checklists/guidelines cover assembly, printed

circuits, machining, sheet metal, and injection moulding.

• Failure Modes and Effects Analysis. Failure Modes and EffectsAnalysis (FMEA) is a methodology for analyzing potential productand process reliability problems early in the development cyclewhere it is easier to take actions to overcome these issues, therebyenhancing reliability through design. The FMEA Worksheet is used toidentify potential failure modes, determine their effect on theoperation of the product or process, and identify actions to mitigatethe failures.





• Product Map. A graphical worksheet that can be used to capturethe planned development of new products that relate to a productline, on a time line.

• Quality Function Deployment. Quality function deployment is a

structured planning and decision-making methodology for capturingcustomer needs (voice of the customer) and translating those needsinto product requirements or technical characteristics, partcharacteristics, process plans and quality plans. PD-Track provides aseries of planning matrices to document the information and plansdeveloped during this process. These include a Product PlanningMatrix (house of quality), Concept Selection Matrix, DeploymentMatrix, and Process Planning Matrix. Note that the Control Planserves as the planning matrix for process and quality control.

• Radar Chart. A graphical tool for comparing the key attributes of a

new product to competitive products or solutions.

• Target Costing Workbook. Target costing establishes a market-driven target price to be successful and derives a target cost todrive product development. Includes a Target Cost CalculationWorksheet, a Target Cost Evaluation Worksheet, and a Target Cost Tracking Worksheet and Charts.



TARGET COSTING CASE STUDYCreactive Consulting S.p.A. is an Italian consulting company in cost

management for medium and large companies. Established in the 2000,now Creactive Consulting S.p.A. is specialised in offering cost



management services such as: expense reduction projects for a specificcost area (e.g. logistics), projects for one specific expense category (e.g.express delivery) or special jobs for critical areas. The firm carried outmany projects of costs reduction for over 100 different clients, both publicorganizations and private companies which belong to Italian and

international firms. Flexibility and concrete approach together with asteady activity to develop new solutions have allowed the company towork in any area and on any category of cost: from the easier generalexpenses to the more complex dynamics of core business costs. Thesuccess of Creactive Consulting S.p.A. is sustained by its system of reward(based on success fees on achieved savings), the active participation inmultidivisional teams, and the ability of consultant to understand thecorporate cost structure of clients (spending data models, demandanalysis, strategy compliance, etc.), the capacity to find feasibledeviations in the cost structure of products and services, and the ability topropose and then test innovative solutions.

Case Study: Culp Inc.Culp, Inc., a US textile manufacturer for the home furnishings industrywith net sales in FY 2008 of $254M, introduced a target costing system in1994. Beginning the project, they realised the need for better-costmanagement and have worked to overcome that issue.Culp’s journey has led them to a realisation that cost management isdifferent from other accounting efforts, and has undertaken a targetcosting program to help them build profits and decrease the cost of theirproducts at the design stage.

“We implemented this system using a team approach to costmanagement and by bringing together the divergent groups inthe company - accounting, engineering and operations - to makeour cost system as up-to-the minute as possible

John M. Brausch, CMA Cost Accounting Manager, Culp Inc.At Culp, they recognised the importance of breaking down the traditionalbarriers of the firm toward cost management. This approach wasaddressed using a series of three strategies.

Strategy 1Separate the functions of managerial and financial accounting so thateach could serve its customer to the best advantage. This separation isimportant to any management accounting system evolution.

Strategy 2Achieve a level of accurate product costing. The accuracy school of costmanagement obviously is concerned with accurate product costs.Although this goal sometimes sounds simplistic, it is not always that easyto get product costs as close to actual as possible.

Strategy 3



Going from the accuracy school to target costing. Costing productsaccurately is a worthy goal. Accurate product costing, however, in and of itself does little to improve the firm’s position and does nothing to reducecosts. This strategy includes the discovery that an overwhelming majorityof costs were created and built into the products before the

manufacturing process ever begins.Although it is used primarily in Japan, Western World companies can adoptthe practice and accrue the benefits resulting from this application of strategic cost management.Cost management can play a major part in any firm’s strategic efforts.Management accountants must become involved in the strategic decision-making processes of their firms. They have a wealth of information aboutthe firm and its operating conditions.

Target Costing in Turkish Manufacturing Enterprises

AbstractRapid developments in technology, change in customer expectations, shortening product lifecycles and especially increasing global competition force the companies reach the targets of “low cost, short time and high quality” at the same time and the highest level possible.Therefore, companies utilize the modern management accounting techniques in achievingthese goals. One of the most important among these methods is “Target Costing”.The empirical study conducted in this paper about target costing is a descriptive researchcovering the years 2007 and 2008. The companies within this study are selected from the top500 manufacturing companies listed in ISO (Istanbul Chamber of Commerce) 2006 index.The aim of the study is to reveal the basic differences between those companies which applytarget costing, in terms of application level and to analyze applicability of the technique.

1. IntroductionIt has become compulsory for today’s companies to reach product-related cost, time, qualityand functionality targets at the same time and at the maximum level possible; in order for them to develop sustainable competitive advantage through producing quality and functional

products as demanded by the customers over a price determined by the market, and tomaintain their existence in the ever changing environment. This compulsion, on one hand,require planning and control of the cost prices of the products and services to continuouslydecrease them, and on the other hand, aggravates profit and cost planning. This situation hasrevealed the concept of market-oriented product development and strategic cost management,and in order to achieve this, various methods and techniques have been developed and put

into practice. One of the methods developed under the leadership of Japanese companies, as aresult of these perceptions, is “Target Costing” method.Being an extension of Japanese management philosophy, target costing has a completelydifferent perception and application process than the traditional perspective both in terms of design and pricing of the product and determination and management of the costs. Despite

being characterized as a cost and profit management technique, target costing has anintegrated application process in which both traditional and modern cost managementmethods must be employed together with marketing, production and engineering techniques.From this point of view, it has the characteristics of a system or a process rather than atechnique.Although the origin and first applications of target costing were Ford Motor Company in the

USA in the early 1990s, Volkswagen in Germany and Marks-Spencer in England in 1930s,the first systematic application and development was by Japanese Toyota in the mid 1960s. In



the late 1980s, it started to be used broadly in the USA, Germany and the other Europeancountries. Target costing came into Turkish literature in the mid 1990s and thereafter startedto be discussed. However, these discussions always stayed at conceptual and theoreticallevels. There were not any sufficient and comprehensive studies about its application level atthat time. In order to fill this gap, a descriptive study on the private sector manufacturing

companies listed in the “Top 500 Turkish Industrial Entities” announced yearly by theIstanbul Chamber of Commerce (ISO) was made.

2. The Purpose, Scope and Constraints of the Study

2.1. The Purpose of the StudyThe purpose of this study is to determine whether target costing is used by the Turkishmanufacturing companies; and whether those companies using the technique apply the

principles of the target costing application process in their customer expectation, profitmargin, cost and price determination, cost reduction and management operations.

2.2. The Universe, Scope and Constraints of the StudyThe universe of the study consists of the private sector manufacturing companies listed in the“Top 500 Turkish Industrial Entities” announced yearly by the Istanbul Chamber of Commerce (ISO). Within 2006 ISO 500, there are 487 private sector companies. Of these, 15companies which did not want their names to be revealed; and 21 companies operating inmining and electricity production industries, which were thought of not suitable for theapplication of target costing; were left out of the scope.Eventually, 451 companies listed in 2006 ISO 500 index made up the universe of the study.The reason of selecting the companies listed in ISO 500 as the universe of the study is the

belief that these companies are more institutionalized and hence they have the strongcorporate discipline necessary for the application of extensive and complex techniques such

as target costing and that more reliable and consistent information can be derived from thesecompanies. Another reason for the selection of the manufacturing companies listed in ISO500 is that target costing is more suitable for and used by manufacturing companies than thecompanies operated in the financial and service sectors, as indicated in most field studies inthe literature as well.

3.1. The Application Level of Target CostingIn this section, the application level and form of target costing among the participatingcompanies and the distribution level in terms of industries are given. It was not directly askedto the responding managers if they have used target costing method. Instead, in order to have

better results and to see if they were using an application even if it is not named target

costing, an encompassing definition and basic principles of target costing process is given inthe survey. It was asked to the respondents to reply the questions by taking this definition intoconsideration.Target costing process is;

• a strategic profit planning and cost management technique,

• in which a product that is to be manufactured in accordance with the functionality and quality demanded by the customer and determined by market research,

• is sold at an estimated sale price (the price which the customers are willing to pay),

• by determining the product cost which will provide the profitability level requested by thecompany.

In the target costing process, sale price of the product determined by the market (customers)

is the starting point of determining the target cost. The sale price and the desired profit margin must be determined before cost. In order to reach the target cost; concentration on



the cost reduction opportunities in the design stage rather than production, constantlyreduction of costs during the product life cycle, participation of all departments of theenterprise and all members of the value chain (accounting, design, manufacturing,marketing, customers, suppliers etc.) to the process of determination and reduction of costs,are required.

According to the target costing definition given above; 53 or approximately 59% of the 90 participating companies stated that they do not apply target costing at all, 14 (16%) stated thatthey apply in a good manner, 1 (1%) of them stated that it started to apply but has not yetfully do so, 10 (11%) stated that they are planning to apply in the future and 12 (13%) of thecompanies stated that they are applying a similar method to target costing under a differentname.The only enterprise which has just started to use the target costing method, the 12 which areapplying a similar method to target costing under a different name and the enterprises whichapply and which do not apply can be grouped. Accordingly, it is revealed that 63 out of 90enterprises do not apply target costing, while 27 of them apply the method.Approximately 11% of the companies stated that they have been applying target costing for

less than 1 year, 22% for 1-2 years, 4% for 2-3 years, 7% for 3-4 years, 7% for 4-5 years and48% of the companies stated that they have been applying the method for more than 5 years.It is seen that the target costing method which has been used by the Japanese companies for approximately 35-40 years and by the US and European companies for many years, iscomparatively new in Turkish companies.Approximately 67% of the companies apply target costing for all of the products and 33%apply for only some of the products. In the field studies done in literature, it is stated thattarget costing can be applied both to all of the products and to only limited products or

product components throughout the company (Kim, Ansari,Bell and Swenson, 1999;Corrigan, 1996; Feil, Hook and Kim, 2004). As per these results, it can be said that targetcosting method is applied to all of the products throughout the company rather than to some

products in the Turkish manufacturing companies.Besides, the level of the cost targets set by the companies support this finding.Approximately 70% of the companies determine cost targets for all of the products in the

product line, 22% determine for only the new products in the product line and 11%determines for only the important parts of a product.In respect of industries and the application rate; 3 out of the 5 companies which operate in theautomotive industry and which responded to the survey apply target costing method and alsothe automotive industry, with %60, has the highest application ratio of target costing.Automotive industry is followed by the others respectively; machine and paper with a ratio of 50%, nonferrous metals with 40%, textile with 38% and food industry with 36%. Theindustries with the least application ratios are as follows; iron and steel with 20%, oil-rubber-glass with 21%, cement with 25%, others (construction) with 25% and chemical industrywith 29%. The participant companies in medical-optical instruments and medicine industrieshave 0% application ratios of target costing. The average application ratio of target costingamong the 90 respondent companies is 30%.Past similar researches done about target costing in other countries reveals the followingevidence; 35% of target costing application ratio was found as a result of the research doneon 60 Indian manufacturing companies in 2001 Joshi, 2001). Similarly, 59,4% applicationratio was found on 32 Dutch manufacturing companies in 2003, 61% was found on 180Japanese manufacturing companies in 1991-92 (Borgernas and Fridh, 2003), 40% was foundon 120 US companies in 1999 (Braxton, 1999), 16,5% was found on 91 Swedishmanufacturing companies in 2003 (Borgernas and Fridh, 2003), 41% was found on 214Malaysian manufacturing companies in 1998 (Sulaiman, Ahmad and Alwi, 2004) and 38%

was found on 78 Australian companies in 1998 (Chanhall and Langfield- Smith, 1998).According to the research done about specific management accounting techniques by



Ernst&Young and the Institute of Management Accountants (IMA) on approximately 2000companies worldwide (40% being manufacturing companies) including the Fortune 1000companies, the application ratio of target costing among the companies is 26% and the ratioof the companies which plan to apply target costing is more than 40% (Ernst&Young andIMA, 2003). Besides, the highest industrial application ratios according to some of these

studies are respectively; automotive (100%), electronics (88%), machine (83%) and medical-optical instruments industries (75%) in Japan (1992); oil-rubber, electronics, textile, steel andmedical-optical instruments (100%), automotive and chemical industries (50%) in the

Netherlands (2003); communication tools (67%), machine and metal industries (30%) inSweden (2003).In the frame of these data; it can be claimed that the application ratio of the Turkishmanufacturing companies both in terms of average and in terms of industry is low, whencompared to other countries. In addition, the common evidence emerging from these studiesis that target costing is applied more in high-tech based assembly industries (such asautomotive, electronics, machine and textile industries) rather than the process orientedindustries (such as medicine, food, iron and steel, chemical, oil-rubber-glass and cement

industries). The results of this study done on the Turkish manufacturing companies supportthis claim as well.

3.2. The Comformity Level of the Application of Target CostingIn this section, businesses using target costing are evaluated in order to determine theapplication level of target costing, in terms of the practices guided by the basic principles of target costing.

3.2.1. Manufacturing Methods of the CompaniesDuring the examination of the field studies in the literature, it was determined that targetcosting is more suitable for the companies which produce a wide range of products in small

amounts by combining numerous parts together, than for those which continuously produce afew number of products in large amounts (Monden and Hamada, 1991). In other words,target costing can be more easily executed in the assembly-oriented industries than in the

process-oriented industries (Morgan, 1993; Gagne and Discenza, 1995; Hergeth, 2002;Dekker and Smidt, 2003).A vast majority such as 70,3% of the companies applying target costing indicate that theyhave “manufacturing-assembly” oriented and 29,6% claim that they have “process-dependent” manufacturing methods, which is an expected situation. Another evidencesupporting this result is the length of the product life cycles (new product development andredesign of the existing products frequency) of the participating companies.

3.2.2. Product Development FrequencyBecause frequent change of design in assembly industries is mandatory, product life cyclesare shorter than those of the process industries. For this reason, target costing is more oftenused by the companies which frequently change design and which have shorter product lifecycles (Hergeth, 2002; Morgan, 1993).40,7% of the companies applying target costing introduce new products to the market in lessthan one year, 29,6% of them introduce in one to two years. The reason of approximately70% of the companies (40,7% + 29,6%) having short product life cycles is that most of them(70,3%) have assembly-oriented manufacturing methods.

3.2.3. Factors Related to the Operation Environments of the CompaniesThe competition environment of the participating companies using target costing or similar

methods was aimed to determine by directing questions to the executives about how they perceive their operation environments.



It is realized that most of the companies applying target costing or similar methods operate inan environment of very high ambiguity and competition. Also in the past studies in theliterature, it is stated that especially Japanese companies developed and applied target costing

because of the increasing ambiguity and the intense competition in the market (Ansari, Belland CAM-I, 1997; Shimizu and Lewis, 1998; Dekker and Smidt, 2003). Therefore, the use of

target costing or similar methods in the markets with environmental ambiguity and highcompetition is quite important for the success of the companies. In conclusion, it can beclaimed that there is an increasing competition combined with a dynamic environment, andthis situation encourages the application of target costing by the Turkish manufacturingcompanies.

3.2.4. Competition Strategies of the CompaniesQuestions were directed to determine the strategies pursued by the companies applying targetcosting in order to ensure competitive advantage, and the degree of importance thosecompanies give to the strategies.According to the statistical averages and percentages, the most important competition

strategy components for most of the companies applying target costing are respectively, (4,60- 85,2%), “offering more quality and functional products“ (4,44 - 92,6%), “manufacturing the products with lower cost and offering with lower price” (4,38 - 85,1%), “offering more and better product features than the rivals” (4,27 - 74,1%), “assuring that the products bedelivered to the customers quickly” (4,19 - 88,9%) and “Introducing new products to themarket against the rivals” (3,56 - 59,2%). Accordingly, it is observed that the companies giveas much importance to the cost leadership strategy as the differentiation strategy. At the sametime, most companies are sensitive about introducing new products to the market before therivals. It is not possible for companies to gain sustainable competitive advantage by followinglow cost-based differentiation strategy, because of the fierce competition they face. For thisreason, today’s competitive environment requires the success-requesting companies

simultaneous competition about price/cost, quality, functionality and speed, which are of thestrategic competition elements characterizing a product. In order to survive, a business must pass or at least catch the performance of the rivals in all of these four dimensions.In conclusion, it is revealed that the companies which use target costing or similar methods

pursue balanced competition strategies.

3.2.5. Factors Concerning the Market Analysis of the CompaniesQuestions were asked in order to determine the examination degree of information about

price, sales volume, customer demands and expectations which are also basic components of market-oriented target costing in the market analysis done by the companies using targetcosting.It can be stated that most companies give enough importance to the determination of theelements of market research which is the starting point of the application of target costing.However, it is necessary for the companies to make more effort about determination of the“probable price that customers may want to pay for the product” (4,23 - 85,2%) which is a

basic principle of target costing application.Market-oriented target costing process executes a product development strategy that focusesthe businesses to the principal opportunity, that is, the ultimate customer. Understanding andrevealing the evident and secret needs of the customers in order to find the product features(in terms of price, quality, and functionality) which provide maximum customer satisfaction,is the most important component of target costing process and needs to be continuouslyanalyzed during the process.Because if customer demands and needs are misunderstood or not understood at all, product

development and design will be delayed and that misunderstanding will be the mostimportant reason for the product failure in the market. Therefore, questions were asked about



at which level of the manufacturing process, how frequently and by which means thecompanies which use target costing and those which do not use assess customer demands andexpectations, in order to determine whether those companies make customer analysis suitablewith target costing.

3.2.6. Determination Way and Time of Customer ExpectationsAccording to the answers, giving more importance to the determination of customer expectations before product design (3,89 - 70,3%) and continuously reviewing during thedesign stage (3,72 - 55,5%) by most enterprises is an expected situation. Notwithstandingthat, this situation creates a limitation in the enterprises not giving enough importance to pre-design market research, in terms of the determination of customer expectations being market-oriented. Therefore, companies must give more importance to the pre-design customer analysis while determining the future products which will satisfy their customers and will besold for profitability as well. Besides, instead of obtainment of the customer input viafeedback (2,84 - 40,7%) from the suppliers and sellers by the companies, further use of systematic methods suitable for establishing customer input, such as survey applications

(3,83 - 59,2%) is a positive situation for the successful application of target costing as well.

3.2.7. Enterprises’ Employment Degree of Long-Term Product and Profit PlanningDuring the target costing process, the enterprises must do product and profit planning inconsequence of the market research after the determination of the customer needs, suitable

product features and the estimated sales volume and price, and before passing to the designstage. These plans will be the basis for the determination of the target costs of the products.For this reason, the results regarding whether the participating enterprises do long-term

product and profit planning which is one of the fundamental requirements of target costing process, and the degree of application. Most of the (4,33 - 88,8%) enterprises’ employmentdegree is “Long-Term Product and Profit Planning” and this is a positive situation for the

successful application of target costing. As a consequence, the companies not doing or notgiving the necessary importance to long-term product and profit planning, which isfundamental both for obtainment of the desired profitability from the product and for thesuccess of target costing applications, need to review their present conditions and establish or revise these plans.

4.3.8. Methods of New Product Price Determination of the EnterprisesThe results concerning which methods and how frequent the participating enterprises usewhile determining the sale price of a new product, which is one of the most importantdimensions of the target costing process, are unexpected.The enterprises frequently use the “cost + profit” (3,46 - 44,4%) method. This is as much of an unexpected situation as their use of the methods “basing on the price which customers arewilling to pay and/or the price that will provide achieving the target market share” (3,52 -51,8%), which are suitable pricing methods for target costing conception. The least usedmethod is the competition oriented pricing method which is based on setting the price “equalto or lower than that of the rivals” (2,74 - 3,7%) which is a component of market-oriented

pricing method that also reflects the target costing conception. The role of the costs in thestage of determination of the target price in target costing application is very unimportant.There are numerous factors to be taken into consideration in a pricing decision. However,among the factors affecting the pricing decisions of the enterprises, cost is usually the easiestand most strictly controllable factor by the enterprises. Therefore, the cost plus pricingmethod which is commonly used by most companies, is completely opposite to theapplication logic of target costing. Because the target sale price in the target costing method

is the estimated price the prospective customers are willing to pay for the product. Thisestimated price is primarily based on the simultaneous prediction of the value given by the



customer to the triad of price, quality and functionality. In addition, it must not be forgottenthat this estimated price is to reflect the balance between numerous factors such as the marketshare desired from the product, the prices of the rival products, long-term sale and

profitability targets of the company and the image of the company. Hence, the dependency of product pricing to cost, will be a handicap for the successful application of target costing.

In addition, despite that the companies give pretty much of importance to the determinationof “the estimated sale price which customers are willing to pay” which is one of the factorscompanies take into account in market research, and that they have a market-oriented

perception, the high application frequency of the cost plus method creates a conflict. One of the evaluation limitations of this study is that; the factors to be taken into account in thedetermination of the product’s sale price, in order for the aforementioned conflict and the

pricing perceptions to be better explained, are not examined.

3.2.9. Distribution of Target Profit Determination MethodsThe methods that the participating companies use in the determination of the target profitmargin of a new product, which is one of the basic components of the target costing process,

are asked to the respondents.According to the answers, the most commonly used method by the companies in determining profit target or profitability ratio is, because of some advantages it has, the return on sales(ROS-37%), as mentioned in the literature as well. Calculation of the profit as a percentage of the estimated cost of the product (22,2%) is completely contrary to the understanding of target costing. Because in the target costing application, the target profit margin must bedetermined independently of the costs and based on the long-term profitability analyseswhich are done in parallel with the financial objectives and the strategy of the enterprise.Profit margin calculated as a percentage of the estimated cost of the product which reflectsthe traditional cost plus approach is, however, calculated based on the expected cost of the

product and contrary to target costing; in this approach, profit margin, but not the cost of the

product, is the dependent variable. For this reason, it is revealed that the companies using thismethod do not have the sufficient perception in terms of strategic profit management, whichis one of the basic components of target costing. Nevertheless, the total application ratio of the return on sales (ROS), return on investment (ROI) and the overall profitability of the

products in the product line methods which are stated to be suitable for target costingapplication and are applied broadly, being 74% among the Turkish manufacturing companiesexhibits a suitable application profile to the understanding of target costing.As a result, the enterprises that determine cost-based profit margin should renounce theunderstanding of determining target profit margins or profitability rates based on costs andapply methods appropriate for strategic profit management.3.2.10. Timing of New Products Cost EstimationThe enterprises included in the research were asked several questions concerning the stagesthey make cost estimation which is made at several stages for determining target cost of new

products as the final objective of target costing.Most of the enterprises make cost estimations seriously and systematically, by 77,8% percent“after the identification of product as a concept”, by 96,3% “during the product designation

phase”, by 22,2% “after the production”. Accordingly, the concentration of cost estimation of enterprises at stages before the production and especially at the designation phase isexpectable from the point of the application mentality of target costing. Therefore, in thetarget costing process, instead of beginning the designation of the product and waiting for therealized costs, initially the target cost is determined (cost estimation is made) for the productthat will meet the functionality and the quality customers seek and also the profit margin theenterprise seek, by means of a market research and afterwards the product is designed in

accordance with this target cost and cost estimation. In other words, the costs that will existduring life cycle of the product are determined at pre-production designation phase and the



production is done in line with these costs after the designation. So all the costs concerning product are estimated or determined at pre-production phase. Also, the fact that 78% of theenterprises that apply target costing states they do not make any cost estimation “after the

beginning of the production” and 100% of these enterprises do not make any cost estimation“after the end of production”, reveals clearly this quality of application process of target

costing. These results show that enterprises have one of the basic reasons for the applicationof target costing.While traditional approaches focuses on determination and controlling of post-productioncosts, the target costing approach is based on the management and determination of costs

before the materialization of costs. Therefore, target costing process necessitates a costestimation system that provide an increasing accuracy level from the concept phase of a

product until being ready for the designation and an extensive cost planning.

3.2.11. Cost Components in the Cost EstimationIn order to identify the extent of the cost estimation systems and cost planning, the costcomponents that take place in the cost estimation of a new product were asked to the

enterprises included in the research.63% of the enterprises using target costing uses pre-production costs, 100% uses productioncosts, 77,8% uses marketing costs and distribution/logistics costs, 59,3% uses“service/support costs and 63% uses recycling costs in the cost estimations. Accordingly, theestimation and determination production costs as the cost component in the pre-production

phase is an expected situation for the application mentality of target costing. On the other hand the number of enterprises that estimate preproduction costs like market research andresearch/development (R&D) costs is lower than the expected for the target costing.Attaching inadequate importance to market research especially to customer analysis and alsoallocating insufficient resources for R&D activities can be stated as reasons for this situation.So it can be said that no estimation and cost planning regarding these cost components are

made. The fact that no research regarding R&D activities has been done constitutes aconstraint for assessment. Similarly, it can not be said that the number of enterprises thatestimate service and recycling costs in the pre-production phase is high. However, themajority of enterprises’ inclusion of marketing and distribution costs in the cost calculation asthe cost component of a new products is a positive situation for the success of target costing.As a result, according to these findings it can be stated that the majority of the enterprises thatapply target costing or a method similar to target costing do have an extensive cost estimationsystem and correspondingly apply a successful cost planning. Also, the replies of theenterprises to questions regarding product life cycle costing approach and cost planningutilization degree supports these findings.Most of the enterprises that apply target costing state that they do “cost planning” (4,22 – 85,1%) for new products and they generally adopt the “product life cycle costing” (3,68 – 51,8%) approach.

3.2.12. Determination of Costs and the Use of Interdepartmental Teams for CostReduction OperationsThe results regarding the determination of costs and the use of cross-functional teams for costreduction operations and the usage degree by the enterprises included in the research.The use of cross-functional teams (4,23 – 81,4%) for the determination of costs and costreduction operations is significantly high. Although this result is expected, for the enterpriseswhere the determination of costs and the use of cross-functional coordination for costreduction operations are low, this constitutes a constraint for the successful application of target costing because target costing necessitates a very high coordination among

departments and forces departments for coordination. The coordination provided by thecross-functional teams that are composed by the participation of the departments in the



enterprise and other value chain representatives, provides that the customer demands aboutthe product and the strategic aims of the enterprise will be understood by all departments andall other value chain members. In this coordination process the basic element that keeps theteams together is the target cost. In order to search for cost saving opportunities regarding thenew product in the all phases, from the designation phase to after sale services, these teams

which will take the responsibility of cost determination, will analyze product design, rawmaterial requirement, production and post-production processes systematically and providethe decrease of unit costs to target cost level. Therefore the use of these teams which areresponsible for result of target costing applications is the most important factor in the targetcost applications. However, just the use of cross-functional teams is not enough for thesuccess of target costing; also the maximum participation of all members of value chainshould be provided.

3.2.13. Participation Rate of Departments and Value Chain Members to CostDecreasing ProcessThe participation level of departments to cross-functional target costing teams in the

enterprises can be said to be high. However, the low participation rate (2,91 – 29,6%) of suppliers that should be the most important members of target costing teams, is a constraintfor the success of target costing activities.As a result of this data, it is impossible to be successful if the cross-functional teams are notutilized in product cost estimation and cost decreasing process or the necessary importance isnot given. At the same time, it can be said that the utilization level and the structure of cross-functional teams depend on enterprises’ adoption level of product life cycle costing approachand the scope of cost planning. Most of the participating enterprises’ possession of theunderstanding of product life cycle costing and the scope of cost planning support thesefindings.

3.2.14. Application Level of the Cost Decreasing ActivitiesThe results regarding the application level of the activities that the enterprises involved in theresearch do for decreasing the product costs are presented below.The cost decreasing activities of the enterprises according to application level arerespectively; “trying to supply cheaper materials and parts without compromising quality”(4,52 – 88,9%), “examining and redesigning pre and post-production phases” (4,52 – 96,3%),“concentrating on product design” (4,15 – 77,7%), “extracting the features and functions thatincreases the product cost” (1,96 – 3,7%) and “using low-quality materials and parts” (1,08 – 0%).According to these results, it can be said that majority of the enterprises tend to behaveaccording to target costing in order to decrease the costs of the products. Because targetcosting is a strategic profit and cost management process which aims at decreasing the totalcosts throughout the lifecycle of the product by concentrating on its design which will enableit to be produced at a cost level that will enable the firm to reach the target profit level or market share without giving concessions from the quality, feature and functionality of the

product that the customers are expecting and are willing top pay for. As understood from thisdefinition, in the target costing method, neither low quality inputs should be used nor thefunctions and features that the customer is willing to pay for should not be extracted from the

product in order to decrease costs. On the contrary, the target costing approach underlines thefact that an enterprise should reach and go beyond the rival products in every one of thesecomponents in order to sustain its competitiveness. At the same time, target costing acceptsthe design of products and processes as the critical point of cost management and costdecreasing. Because more than 80% of the lifecycle cost of a product is determined during

the design and development stage and because the product and process technologies begin to be more integrated, both the design of the product and the activities needed to produce the



product is the most important factor for cost decreasing. This is why during the target costing process, by focusing on the design, which will enable cost decreasing throughout thelifecycle, it is determined whether the design may or may not cause after production costswhich are not appropriate for customer value and income. Thus, in this way some timeconsuming and expensive changes that might be faced are eliminated beforehand and both

the cost of the product and market entrance period is decreased.

3.2.15. Application Degree of Methods, Tools and Techniques That Can be BenefitedFrom Decreasing CostsAt the same time, the value engineering technique during the design of the product, thesimultaneous engineering applications during the design of the products and processes andthe kaizen costing approach which expresses the constant improvement of the processes

before and after the production all give an answer that support this finding. In addition to this,during cost decreasing and management the use of Total Quality Management, ActivityBased Costing/Management and On Time Production are very important in terms of thesuccess of the target costing applications.

The methods, tools and techniques that can be used to decrease product costs by companiesthat use target costing are listed according to their application degrees as; “constantimprovement (Kaizen)” (4,48 - 100%), “total quality management” (4,33 - 92,5%), “valueengineering” (4,00 - 59,2%), “value analyzing” (4,00 - 59,2%), “on time production” (3,96 -70,3%), “action/operation based costing” (3,92 - 62,9%) and “simultaneous engineering”(3,23- 44,4%).As a result, it is a positive fact –in terms of the success of target costing applications – whichthese methods, tools and techniques that can be used in decreasing production costs and their management is highly used by many companies. Although the fact that the amount of valueengineering/analyzing, total quality management and Kaizen costing techniques which enablefocus on product and process design plus detection of cost savings are used more by

companies to decrease costs to desired levels and their management, it can’t be said that theusage level of specially simultaneous engineering between companies is high. This is why,companies must give more weight to the simultaneous design of products and productiondesigns to benefit from target costing applications greatly.3.2.16. Application Level of Strategies that will be Followed when CompaniesDetermine the Costs Foreseen in the Designing PeriodThe results according to the application degree of strategies that will be used when companiesdetermine that the cost foreseen in the designing stage will be exceeded or when it isdetermined that it can’t be decreased to target cost levels assessed before production areshown below.Most of the companies give priority to decreasing the amount of profit expected (3,37 -48,1%) and increasing the foreseen price of the product (3,12 - 37%) strategies. Decreasingthe profit margin by the management which is determined according to the strategic purposesof the firm may be an appropriate strategy to increase the market share of the product and to

position it in the market.Although decreasing the target profit margin may seem negative at first glance, with anincrease in sales related with market conditions or with an increase in the cost of the productrelated with its lifecycle, reaching the targeted profit rate will be possible. At the same time,this strategy can be analyzed according to the total profit rate of a product group which a

product belongs to. Before taking a decision on lowering target margin of profits desired,these situations should be well analyzed.Secondly, in the target costing implementations, increasing of target sale price, which will bedetermined to depend on wishes and ability to pay of customers independently from cost,

may be is the last strategy which should be evaluated because in the competitive marketconditions, acting with cost plus pricing contrasts strongly, with target costing



implementation reasons. In order to determine a high price level, product should be reallynew product which can raise its value perceived by customers and should be different fromits rival products or business should have the monopolist or price determining position in themarket. But, this situation should be carefully analyzed in terms of market share or salesvolume which will enable the level of profitability which the business desires. However, it

can be said that one of the reasons of high level implementation of this strategy is thatcompanies quite use cost-plus method in pricing of new products. In order to clarify thereason why this strategy is chosen, the fact that factors, which should be taken into accountwhile determining target sale price, have not researched in this study does not constitute theassessment deficiency.The third strategy of companies to define the implementation degree is either abandoning the

product or disapproving [discarding] its production (2,36 - 11,1%) as a last resort. Because,too much time and effort has been allocated to the product. Although in successfullyimplemented cost targeting practices, the possibility of abandoning the product is too low,this strategy should be resorted just in the cases where alternative solutions exhausted for achieving cost targeting. However manufacturing of any product that doesn’t contribute to

the strategic goals of the business should not be let.The fourth strategy of companies for implementation degree is shrinking product qualitiesand functions (1,50 - 0%). This strategy should be implemented if diminishing qualities of the

product affect market price, which is used for determining the target cost, positively. Thestrategy of raising target cost of a product should be resorted in extra-ordinary cases if

presence of a specific product increases the demand of other products that enforcescontinuation of the product line; or in cases on time product supply prevents market share andincome loss. In such cases cost increases should be dealt immediately by over viewing design

process in detail and developing other counter measures.Incautious measures distort necessary discipline for achieving target costs.Consequently, half of the companies’ primary strategy of increasing selling prices affects the

implication of cost targeting negatively. Scarce need for application of increasing target coststrategy is particularly good.3.2.17. Level of Relationship of the Companies with Their SuppliersThe results inferred from the answers of research-partaken companies to the question aboutthe level of relationship with their suppliers are submitted below.Among the companies using target costing and in terms of the priority given to the

participation in the statements reflecting the degree of relations with the suppliers; althoughcompanies’ stated (3,93- 77,7%) that during the stage of product and process designcontinues coordination with the suppliers is positively accepted; sharing all kind of information including design costs via regularly incorporating important producers in the

product design process reflecting the quality of this coordination, (2,96 - 40,7%) and the lowlevel of support and education provided to producers about the problems they face arenegative situations. Sharing information on design and costs as well as other costmanagement techniques between companies and suppliers in order to find proper ways todecrease costs is the basis of the benefits of target costing process. On the contrary, it could

be affirmed that the relationship between companies and suppliers is built on sharingtechnical information regarding the design and keeping suppliers under control (4,08 -70,3%) through determining cost objectives rather then sharing information on the productdesign. In other words, there is pressure to achieve these objectives via predicting costs of the

product components provided by the supplier instead of ensuring the participation of suppliers in the cost predicting process.Similarly, these findings are also supported by the cost predictions of suppliers for new

products and the low degree of involvement in the cost decreasing process. In addition,

although the dependence on companies in terms of the job or the companies control over suppliers is low (3,42 - 48,1%) the pressure of the companies, which have a cost pressure on



the suppliers, may only be balanced by helping the suppliers’ lower costs. This can only beachieved by putting suppliers inside the product cost analysis before determining target costs,helping suppliers with the problems they face during design problems and sharinginformation plus experiences related to quality, delivery, customer wishes and costmanagement. By this way, this strategic cooperation will enable early assessment of the

prices of products and will also enable new ideas to come forth about companies makingalternative design possibilities, which makes it easier to reach the desired functioning levelduring decreasing costs.As a result, during target costing, it is almost impossible to decrease costs without the

participation of suppliers. The suppliers must be seen as part of a developing firm and astrategic partner. This is why, if the weak relationship between the suppliers and theenterprise turns to a more cooperative structure and if the integration degree of the design

process is increased, then it is more likely that the gain from target costing and the possibilityof it being applied successfully will increase.

4. Conclusion and Suggestions

The primary results of this evaluation study concerning the application level of target costingamong the Turkish manufacturing enterprises (ISO 500) can be summarized as follows:

• The companies applying target costing or having a similar process have extensive marketanalyses and marketing information systems.

• They follow balanced competition strategies.

• They must give more importance to determine the customer expectations before the product design, in order to fully provide the expected benefit from target costing.

• Their pricing of the new products by depending on cost usually poses an obstacle to thesuccessful application of target costing.

• They have comprehensive cost estimation systems and can be considered as applying cost planning successfully. Correspondingly, most of these companies have the understanding of

product life cycle costing.• If weak relationships between these companies and their suppliers is transformed to a morecollaborative structure and if the integration degree of the design processes is increased, the

benefits to be gained from the target costing process will increase evenly.

• Majority of these companies operate in competitive market conditions.



Google documents:➢ Baker, William A., “The Missing Element in Cost Management:

Competitive Target ➢ Costing.” Industrial Management➢ Bhimani, Al and Okano, Hiroshi, “Targeting Excellence: Target Cost

Management at Toyota➢ Brausch, John M., “Beyond ABC: Targeting Costing for Profit

Enhancement.” Management Accounting➢ Cooper, Robin,. “Japanese Cost Management Practices.” CMA

Magazine➢ Corrigan, John, “Target Costing – A New Approach.” Australian

Accountant➢ Gagne, Margaret L. and Discenza, Richard, “Target Costing.” Journal

of Business & Industrial Marketing➢ Hales, Robert and Staley, David, “Mix Target Costing, QFD for

Successful New Products.” ➢ Koons, Frederick J., “Applying ABC to Target Costs.” Western World

Association of CostEngineers Transactions➢ Lee, John Y,. “Use Target Costing to Improve Your Bottom-Line.” ➢ Newman, Richard G. and McKeller, John M., “Target Pricing - A

Challenge for Purchasing.” ➢ International Journal of Purchasing & Materials Management➢ Worthy, Fred S., “Japan’s Smart Secret Weapon.” Fortune

Wikipedia http://www.npd-solutions.com/target.html www.businessdictionary.com/.../target-cost.html European Journal of Social Sciences

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Target Costing Accounts

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