Target Costing Is An Approach To Managing Product Costs Essay Example

Target Costing Is An Approach To Managing Product Costs Paper This paper discusses the usage and procedure of mark bing for merchandise development and cost direction and why it should be used in merchandise planning. To explicate the mark bing procedure, benefits, and jobs with its usage, the writers utilize a instance survey of a domestic fowl treating company fabrication place repast replacings for sale through supermarkets. Testing the efficiency and effectivity of ABC theoretical accounts, utilizing assorted methods, has been widely highlighted in early empirical surveies. The survey makes usage of secondary informations available from early empirical literature on execution of ABC theoretical account in banking industry. Although, the theoretical account proved to be successful when implemented in the banking industry, figure of jobs still remain acute, which prevents from monolithic debut of a new theoretical account within a sector. In response, some recommendations were drawn to plan a method of get the better ofing or deciding many of the issues around ABC. The distribution of acceptance over industries confirmed the outlook that piecing houses show a comparatively high acceptance of mark casting. The acceptance of these techniques appears to be related to an intense competitory and unpredictable environment. Similar to aim projecting surveies in Japan and Germany, the chief aim for following these techniques in the sample is to cut down costs. The merchandise development and design sections appear to be taking in the mark cost direction procedure, while the accounting section is merely reasonably involved. Finally, the most often adopted organisational signifier for mark cost direction is team constructions, in which multiple maps combine cognition and capablenesss in the merchandise development procedure. Introduction Target costing is an attack to pull offing merchandise costs and gross borders that works rearward from the monetary value a client will pay for a specific merchandise with a specific characteristic set, sets merchandise cost marks based on that merchandise s expected gross border and so manages the development procedure to accomplish the marks. This is different from how many companies approach merchandise costs, where the squads may put marks based on historical informations and anticipation, and so put the monetary value by adding a specific per centum of borders. Target bing topographic points client value at the centre of the fiscal determinations that a development squad makes about a merchandise. To make this efficaciously, a squad needs to cognize such things as how much extra a client will pay for a specific characteristic or degree of public presentation, which countries of the merchandise may be over-performing or particularly hard to fabricate, how to re-think a merchandi se design to do it easier and less expensive to bring forth, and how to spouse with providers to drive down costs. The thought is to rethink our premises about a merchandise and inquire our clients straight to give us guidance on the elements of the merchandise that create the most value for them so that we can present them more efficaciously and extinguish everything else. We will write a custom essay sample on Target Costing Is An Approach To Managing Product Costs specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Target Costing Is An Approach To Managing Product Costs specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Target Costing Is An Approach To Managing Product Costs specifically for you FOR ONLY $16.38 $13.9/page Hire Writer The chief benefit of this attack is increased gross borders, chiefly by cut downing direct labour and stuff costs for the merchandise. One design end can be fewer parts, which leads to nest eggs in stock list direction throughout the supply concatenation. The same techniques normally lead to merchandises that are easier to transition to fabrication, more dependable and easier to keep, which besides drives down development, guarantee, service and support costs. Surprisingly, this attack can do clients happier, excessively. By simplifying the merchandises to cut down extra characteristics and complexness, we can do the merchandises easier to utilize and keep from the clients position. They besides benefit from lower service and support costs, and higher dependability. The mark bing construct grew out of a demand for makers to better merchandise cost direction and merchandise development. The traditional cost direction, cost accretion and allotment methods used for decennaries and still predominant in the fabrication and services sectors have failed as tools for merchandise development, planning, and cost direction. This is because they focus on the merchandise s cost instead than on the outlooks of clients and the merchandise design itself. Furthermore, traditional cost systems inundate directors with accounting studies that routinely overstate the cost of high-volume, standardized merchandises and understate the costs of low-volume, customized merchandises. ( Lockamy III and Smith, 2000 ) . In 1999, Cooper and Slagmulder defined three phases of mark costing: Puting the market monetary value: In this stage, Marketing sets a mark monetary value for the merchandise, and provides the development squad with a prioritized list of characteristics that will present a merchandise that the client will purchase at the mark monetary value. Pull offing the merchandise cost: The development squad sets a mark cost for the merchandise that will run into the organisation s outlooks for gross border. They set up a procedure for supervising merchandise cost through the development rhythm. Pull offing subsystem and portion degree costs: Using bing merchandises and competitory informations as ushers, the squad creates a budget for each subsystem and major constituent. The squad so develops a scheme for shuting any spreads between the expected costs and the mark cost and engineers the merchandise to accomplish the costs. Along the manner, the squad continuously proctors both subsystem and merchandise degree costs to measure advancement towards shuting the spread and turn to the issues that arise. These three stages provide a comprehensive focal point on merchandise cost throughout the merchandise lifecycle that pulls together the full development squad. In the beginning, Marketing is to a great extent involved in puting the mark monetary value and assisting the development squad understand comparative value for characteristics and public presentation parametric quantities. Manufacturing people get involved early in one instance, every bit early as the construct stage, to supply early feedback on production procedure options and their costs. Procurement and providers besides get engaged to lend thoughts for shuting the inevitable spreads between projected merchandise costs and targeted costs. The demand to better productiveness and merchandise quality resulted in many companies following new cost direction methods, including activity-based cost direction, kaizen costing, just-in-time stock list direction, entire quality direction, and mark costing. ( Lockamy and Smith, 2000 ) . Of the foregoing cost or direction methods, mark bing stands entirely as the best agencies to heighten merchandise development, pricing, and direction of production and merchandising costs. This paper argues for greater usage of mark costing. The first subdivision of this paper gives an overview of empirical literature on ABC theoretical account, and in peculiar, an execution of the theoretical account in fiscal services ( chiefly in banking ) industry. The research supports an statement for a demand to implement ABC theoretical account at service industry in order to be able to understand the behaviour and causes of costs. The undermentioned subdivision illustrates a practical facet of ABC in banking industry. The survey makes usage of secondary informations taken from academic beginnings. It inside informations the phases of ABC methods and presents the benefits. Most significantly, the documents draws attending to the obstructions that many Bankss face while seeking to implement the ABC in pattern. Finally, the last subdivision will reason the thoughts in this paper by pulling recommendations to the bank direction that make it easy to get the better of the jobs in the procedure of implementing ABC. Literature Review Target costing has been defined by the Consortium for Advanced Manufacturing International as a set of direction tools and methods designed to ( 1 ) direct design and planning activities for new merchandises, ( 2 ) supply a footing for commanding subsequent operational stages, and ( 3 ) guarantee that merchandises achieve given profitableness marks throughout their life rhythm. ( Cf. Shank, 1999 ) . Cooper and Slagmulder depict it as a procedure for guaranting that a merchandise launched with specified functionality, quality, and gross revenues monetary value can be produced at a life-cycle cost that generates a satisfactory degree of profitableness. ( Cf. Lockamy and Smith, 2000 ) . The procedure is design-centered and has a market goaded focal point, which, unlike the conventional cost direction techniques, allows houses to merchandise off quality and functionality to accomplish mark costs as a last resort. ( Castellano et al, 2003 ) It really focuses less on costs and more on client demands. The inquiry is non How much will the merchandise cost? but How much can the merchandise cost? Karo describes mark bing as a complete cost-reduction plan, non a simple cost-reduction technique, but a complete, strategic net income direction system. Horvath describes it as a portion of the cost-management map for a merchandise throughout its life rhythm. ( Cf. Shank, 1999 ) The cardinal elements of the procedure is that it is a planning tool where facets of the merchandise, cost and otherwise, are considered over the merchandise s whole life rhythm. Besides, it is a cross-functional procedure, much like good strategic planning. A topic that receives increasing attending in accounting literature is the usage of cost in formation and cost direction during merchandise design ( Anderson and Sedatole, 1998, Davila, 1999 ) . The major statement for pull offing costs during merchandise design is that after the merchandise development phase most costs have been designed into the merchandise and can non be influenced any longer. One of import technique that can be used for pull offing merchandise costs during the design phase is target casting ( Kato, 1993 ; Ewert and Ernst, 1999 ) . Target casting is basically concerned with puting a mark cost to be achieved in the merchandise development procedure, such that a sufficient net income border is realized when the merchandise is brought to the market. In the literature, mark casting is viewed as a strategic direction accounting system, as it focuses on long-run cost direction attempts ( Chenhall and Langfield-Smith, 1998 ; Ewert and Ernst, 1999 ; Guilding et al. , 200 0 ; Tani, 1995 ) . Toyota developed the construct in the sixtiess. It is used more in Japan than anyplace else in the universe. Lockamy and Smith study that in the early 1990s over 80 per centum of Nipponese assembly fabrication houses were utilizing mark costing, including all houses in the Nipponese transit equipment industry but none in the paper and mush industry ( Lockamy and Smith, 2000 ) . The remainder of the universe has non as readily adopted mark bing, although many companies adopt certain facets of it. It has been peculiarly slow to be adopted in the U.S. Banham studies that in the twelvemonth 2000 merely about 65 U.S. houses utilised mark bing. Of these, 85 per centum were discrete-parts and finished-product makers. Some of these houses include Boeing, Eastman Kodak, Caterpillar, and Daimler-Chrysler. A study of those U.S. houses reveals favourable, although non exceeding, consequences from using mark costing. ( See the study consequences in Banham, 2000. ) Peter Zampino, manager of research at Consortium for Advanced Manufacturing International ( CAM-I ) , noted that U.S. houses tend to follow mark bing when they are in crisis manner. In his sentiment, U.S. houses tend to hold the sentiment that in good economic times a company does non necessitate mark bing ( Banham, 2000 ) . U.S. houses like the construct of cost direction, and many use the techniques describ ed in this paper, but they do non follow the disciplined mark bing procedure and the cross-functional engagement in merchandise, production, and supply concatenation planning activities ( Banham, 2000 ) . In literature, mark casting and mark cost direction are frequently associated with Nipponese companies. Empirical research into the patterns of mark casting has chiefly been performed by Nipponese research workers for the Nipponese state of affairs ( Kato, 1993, Tani et Al, 1994 ) . Few attempts have been made to look into whether these patterns are besides are relevant for and make occur in non-Japanese state of affairss ( some exclusions are Chenhall and Langfield-smith, 1998 ; Guilding et al. , 2000 ; Horvath and Tani, 1997 ) . One could anticipate that as the drivers for utilizing such methods are non idiosyncratic to Japan ( i.e. , the desire to recognize a net income border on merchandises, under certain market features ) , they could besides be used in a non-Japanese state of affairs, even though the existent application of such patterns may divert from the typical Nipponese manner. Chapter 2 2.1 Research Methodology and Data Collection The ABC theoretical account follows a two phase methodological analysis, foremost, by puting the relationship between resources and activities through the usage of allotment bases and direct tracing. Then followed by an application of cost per unit of activity to the ingestion of activities by specific cost objects, normally merchandises or clients, for the intent of mensurating costs. In banking industry, the ABC provides an efficient manner of forming the aggregation, processing, and coverage of cost information for determination devising and scheme preparation in a competitory economic environment. The survey is chiefly based on empirical probe of the efficiency of implementing ABC in banking industry. Hence, the research paper will do usage of a secondary information on banking industry contained in early empirical surveies. The banking industry of Uzbekistan could non function as a research object, due to the fact that ABC has non been introduced in, yet. However, sing big benefits of holding ABC in topographic point, the paper urges policy shapers and direction to get down its execution. The secondary information is chiefly drawn from interview and questionnaire consequences. 2.2 Target Costing in Process The mark bing procedure is composed of a figure of distinct activities and determinations. It begins with a finding of the merchandise, its features and qualities, and its optimum merchandising monetary value. This is likely the most of import measure in the procedure. The merchandise itself will finally find the costs necessary to bring forth and sell that merchandise. Butscher and Laker depict this first measure as including ( 1 ) definition of the mark sections, ( 2 ) designation of the competitory advantages and disadvantages, ( 3 ) placement of the new merchandise within the mark sections, ( 4 ) fine-tuning the merchandise design and pricing, and ( 5 ) market simulations ( Butscher et al, 2000 ) . Market research is an indispensable component of this first measure. Whether done within or outside the house, market research should concentrate on the desires and concerns of the client. What does the client privation? What design features does the client like or dislike, need or does nt necessitate. The client s perceptual experiences as to quality, monetary value, and value are besides of import. The selling research is used to find the monetary value clients are willing to pay for the merchandise, given its functionality, quality, and the replacement merchandises offered by viing houses. ( Lockamy and Smith, 2000 ) The information obtained from the client will let merchandise interior decorators to concentrate on those desired qualities and characteristics. However, the merchandise must be advanced and integrated new characteristics and outstanding merchandise features to guarantee merchandise distinction and a sensible merchandise life. The mark merchandising monetary value is determined based on the market for the merchandise as designed. Obviously, when a maker sells its merchandises in more than one market or through different channels, it may sell the same merchandise at different monetary values. For illustration, pharmaceuticals manufactured in the U.S. are exported at lower monetary values to Sellerss in Canada and Mexico than they are sold for in the U.S. In such instance an mean merchandising monetary value should be used ( Cooper et Al, 1999 ) . The 2nd measure in the procedure is the finding of the coveted net income or aim net income border. Net incomes and net income border should be sensible and cover planned costs, extra required investing, and decommissioning or disposal costs over the merchandise s life rhythm. Similarly, the net income border should be sufficient to back up go oning merchandise research and development. ( Lockamy and Smith, 2000 ) Some companies, for illustration, Sony Corporation, construct in more flexibleness in set uping the coveted net income or aim net income border. There, they allow for trade-offs between different merchandises, i.e. , within the merchandise group some merchandises will hold some net income borders higher and some lower. ( Cooper et Al, 1999 ) The coveted net income border should be based on, and meet, the company s aims or policies. Calculation of the allowable merchandise cost is the 3rd measure in the procedure. The allowable merchandise cost is the difference between the mark merchandising monetary value and the mark net income border. The aim is to run into the cost restraints placed on the company, or as Cooper and Slagmulder describe it, set uping the mark cost decrease aim. The 4th measure in the mark bing procedure is finding the nature and sum of the merchandise fabrication and selling costs and really guaranting itself that it can achieve those mark costs. These costs can non transcend the allowable merchandise costs, unless palliating fortunes, such as a targeted merchandise release day of the month, order continuing with the merchandise before sufficient costs decreases are obtained. This portion of the mark bing procedure terminals when the house discovers a manner to fulfill the client demands at the mark cost or when the merchandise is abandoned ( Lockamy and Smith, 2000 ) . What has been the company s past production and selling costs? Will new cost nest eggs be required? What will be the consequence of merchandise alterations? In what countries can one moderately anticipate cost nest eggs? How shortly must the merchandise be released? Will the allowable cost require alterations in the supply concatenation? These are merely some issues that may originate in continuing through the procedure. Because from time-to-time there are unexpected cost overproductions due to design-related jobs in the production procedure, a company may construct in a shock absorber or modesty for the production director of 5-10 per centum to cover such costs. In finding what costs are necessary and placing ways to cut down costs, a company may utilize other cost direction techniques like value technology, benchmarking, design for industry and assembly, and quality map deployment. ( Cooper et Al, 1999 ) Besides, uninterrupted cost decrease may be available through kaizen costing. Integration of the assorted maps, such as accounting, buying, selling, production, logistics, and technology in planning activities will be necessary here to cut down unneeded costs and work procedures. As the mark bing attack is a cross-functional squad attack, ab initio it is clip extended but the final payment for the extra planning costs should come subsequently in nest eggs in production and the supply concatenation activities. Notwithstanding that cost decrease is normally favourable, in mark bing cost rationalisation, non cost minimisation, is the end. This is consistent with techniques like value technology, which is performed to redesign the merchandise, its fabrication procedure, and its distribution and service systems. ( Lockamy et wholly, 2000 ) Cooper and Chew argue that a merchandise s cost demands to be subjected to the examination of the market place from the beginning of the development activity. ( Cooper et Al, 1996 ) Benchmarking helps avoid the flightiness in mark bing in such state of affairss as internal subassembly and can assist to cut down costs, particularly when value technology is used early in the product/production development phase ( Clausing, 1996 ) . In add-on, benchmarking provides a tool for mensurating the effectivity of mark costing. For illustration, Eastman Kodak set a benchmark of a 10:1 return on the costs associated with implementing mark costing. If it cost the company $ 100,000 to hold an applied scientist work closely with clients in merchandise design, the return on that activity would hold to bring forth at least $ 1 million in cost decreases ( Banham, 2000 ) . Cost decreases should be sought in the maker s internal activities and external sourcing. Although a maker has important legal and ethical duties in keeping safety and wellness of its employees, clients, and users of its merchandises, and legal and regulative demands go more and more burdensome every twelvemonth, companies must cut costs wherever possible. Sometimes, nevertheless, cost nest eggs are merely non possible, and the merchandise features must be scrutinized once more to insulate cost nest eggs. The supply concatenation should be scrutinized and utilized for cost decrease chances. The supply concatenation is much more of import for companies using mark costing. Ellram notes that supply direction and the buying map is peculiarly critical at the initial phases of the mark bing procedure when developing component-level mark costs and when activities and alterations are happening to accomplish mark costs. Furthermore, provide direction can play a really of import function in pull offing, monitoring and bettering costs in the supply concatenation ( Ellram, 2002 ) . When geting constituent parts or necessary services, supply direction may happen it necessary to work more closely with providers. Additional cost nest eggs may be accomplishable by making trading spouse relationships with the providers. The maker s main applied scientist or merchandise director might seek to help or supply inducements for a provider to redesign a portion or production procedure to accomplish cost nest eggs. Furthermore, the company and the provider may join forces to develop and better merchandises and heighten the value and satisfaction provided to clients. ( Lockamy and Smith, 2000 ; Banham, 2000 ) The trading spouse relationship may make administrative cost nest eggs through EDI, B-2-B ( business-to-business ) minutess, or by supplying inducements or wagess for inventing originative cost decrease steps ( Cooper et Al, 1999 ; Lockamy and Smith, 2000 ) . In order to keep the trading spouse relationship, nevertheless, the company must let the supplier-trading spouse to have a sensible compensation doing continuance as a trading spouse worthwhile. The trading spouses, including the company using mark costing, must be assured of profitableness and survivability. ( Lockamy and Smith, 2000 ) . This portion of the mark bing procedure is iterative. Costss are estimated determined for the merchandise as designed. It may be necessary to reconsider certain of the design features given the cost factors. A finding would so hold to be made to cancel the merchandise characteristic or to revise it, which would necessitate another reappraisal of the production and supply concatenation procedures and costs. Finally, the mark bing procedure requires supervising to do certain the procedure has been effectual. Merchandises must be changed from time-to-time and new merchandises added to bing merchandise lines, and these activities will necessitate merchandise and cost planning every bit good. 2.3 Defining Target Costing Methods in Selected Industry Chapter 3 3.1 Research Analysis Mentioning to the current survey Target casting was defined as consisting of a casting method ciphering the maximal allowable cost monetary value by deducting a needed net income border from the expected merchandising monetary value. Most of the endeavors in industry, particularly the electronics, fabric and preciseness equipment industries make comparatively high usage of these techniques. This confirms to outlooks, as assembly industries are considered the most executable industries for the usage of mark costing. This diverseness of names used implies that many houses have developed a system based on similar rules as mark casting, without being familiar with the construct and its rules. Therefore, in empirical research into these types of systems it seems reasonable to concentrate on the features of the system used, and non on its theoretical name. An account for the insignificance of the figure of rivals is that this step may include small information about the in 10s of the compe titory environment, which is theoretically most of import. During the merchandise development procedure several ends have to be realized at the same time, for which purpose mark projecting systems can be supportive. Different ends to be realized are high merchandise quality, client satisfaction by developing functional merchandises that fulfill their demands, fast merchandise debut ( clip to market ) and low costs. Based on the literature we expected cost decrease to be the most of import ground for following a mark casting pattern, as its chief intent is to present merely profitable merchandises to the market by achieving equal cost degrees. The inquiries about the organisation of mark casting in the study were related more to the TCM procedure. They measured the engagement of different functional sections in the application of mark casting, and the organisational signifier used for the mark casting patterns. ( shown in table 2 ) TCM squad rank is besides a step of engagement, alth ough it is merely enlightening about the presence of the section in the squad, and non about the grade of engagement. 3.2 Decision This exploratory study survey suggests Dutch listed fabrication companies make comparatively high usage of projecting techniques similar to the construct of mark casting, although these systems come by in a diverseness of names. These techniques are adopted across industries, of which the collection industries are the major users. The findings suggest that these techniques are comparatively more frequently adopted under fortunes of intense competition and high environmental uncertainness, for which conditions, harmonizing to the literature ; the usage of mark casting is good. The consequences suggest that the chief aim for following these techniques was to cut down costs. This end seems to hold been achieved by respondents, as the major benefit derived from the mark casting patterns was cost decrease. The sections Product Development and Product Design are most to a great extent involved in the application of mark casting, while the Accounting section seems to be least involved. The house s mark casting attempts are chiefly organized in squad constructions, in which cognition and capablenesss of different organisational maps are combined to work on the mark cost. Wijewardena and De Zoysa ( 1999 ) , for case, provide an overview of some specific features of Nipponese companies under which the direction accounting systems operate, dwelling of corporate determination devising, alone company doctrines, farm outing schemes and the firm-specific instruction and preparation of direction comptrollers. It wil1 be clear that in this exploratory analysis it wil1 be hard to touch upon these issues. Qualitative research may be a preferable research methodological analysis to widen the analysis to these issues. From this research we can reason that Dutch listed fabrication houses use projecting techniques that are similar to the construct of mark casting ; the casting method identifies a mark cost by deducting a needed net income border from an expected merchandising monetary value. However, this survey provides small insight into the existent organisational procedures and actions that proceed, and are initiated by these mark costs. In add-on, the function and importance of the mark projecting system in relation to the usage of other direction accounting systems wil1 be worthwhile analyzing, as the recent study research by Chenhall and Langfield-Smith ( 1998 ) and by Guilding et Al. ( 2000 ) has shown merely modest grasp for mark projecting systems by Western houses. As banking merchandises become progressively complex, as shared services become more widespread, and as indirect costs consume more budgets, the ABC theoretical account can function as an first-class analytical tool for the fiscal services sector.