May 2, 2019

Target Costing and Target Cost Management

Strategic Cost Management Course Articles

Target Costing 

Target costing is strategic decision.

Target costing is based on three premises: 1.) Product design and development has to be oriented to customer affordability or market-driven pricing, 2.) Product cost is to be treated as an objective or a constraint variable determined by the market conditions during the definition of a product's requirements, and 3.) Proactively working to achieve target cost during product and process development.

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

The company can have a policy of target costing. For any new product to be introduced, marketing comes out with an estimate of the price and sales quantity schedule. From this information, and information available on capital outlays required (an approximate estimate), a decision is taken to target a price point. From this price point, the required profit margin is deducted to get a target cost for the product and the product development team is given this target cost as the development goal. Therefore, development has a technical goal, the new product has to perform the specified function, it must be durable, maintainable, it must have quality, and also it has to be within the target cost. To ensure that the developed product is within the target cost, the development team needs cost estimation assistance on a continuous basis. Value engineering is normally taken up after some years of selling the new product. Target costing requires concurrent value engineering. Value engineering requires cost information.

Cost accountants and cost estimators have a significant role to play in an organization which is pursuing target costing as a strategy.

Design to Cost and Value Engineering 

Design to Cost and Value Engineering are used to reach the cost target costs.

Value Engineering Basics and Techniques - 15 Video Presentations Play List



For More Detailed Reading

Target Costing

What is Target Costing? A Presentation in pdf format

Best Practices in Target Costing

Japanese Cost Management
Yasuhiro Monden
World Scientific, 2000 - Business & Economics - 490 pages

This book deals with the systems of cost reduction that originated in Japan. These are mostly new systems that did not exist in western practices before they were utilized in Japan. The book also presents the Japanese ways of carrying out the globally popular cost reduction practices.(1) It describes the strategic cost management conducted by top management through alliances between companies and/or between government and industry.(2) It shows the functional cost reduction systems along the various phases of the product life cycle, as follows: R&D ? Product development ? Manufacturing ? Administration and indirect operations(3) It conducts some humanistic or behavioral aspects of Japanese cost reduction systems.

Management Accounting: Feed Forward and Asian Perspectives

A. Nishimura
Springer, 10-Jan-2003 - Business & Economics - 186 pages
This book examines present management accounting issues in the light of Japanese experiences. This is particularly important in the study of management accounting since Japanese management not only learnt from the West but also grew out of it. The book describes the importance and meaning of feed forward management accounting, compares Asian and Japanese management accounting with the Western approach and examines the philosophy behind them. It ends by looking into the future of management accounting science.

Nishimura's articles are available on net for download. Search Google.

Index of articles on Financial, Cost and Management Accounting 

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Updated 3 May 2019,  7 August 2017, 24 November 2011