Page 273 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes customers’ value in this type of product and the important features that are lacking.
Consumers would be asked what features they would like to have in the product.
(b) After preliminary testing, the company should be able to pinpoint a market niche it
believes, is under supplied and which might have some competitive advantage.
Only then a company can set a target cost close to competitor’s products of similar
functions and value.
2. Development phase:
(a) The design department should subject the most competitive product on the market
to reverse engineering analysis. This study will detail materials used, manufacturing
process needs and the design department can estimate the competitors cost structure.
By gaining further information on the different parts that make up the product, the
company can also start conducting make or buy analysis.

(b) After trying to identify the cost structures of the competitor, the company should
develop estimates for the internal cost structure based on internal costs of similar
products being produced by the company.
(c) After preliminary analysis of the cost structures of both competition and itself, the
company should further define these cost structures in terms of cost drivers. Analysis
of cost drivers will give a better idea of the manufacturing process and can help
reducing waste, improve quality, minimise non-value added activities and identify
ineffective product design.
3. Production phase: Target costing is most effective in the development and design phases
of new products but it is also useful in the later stage of the product life cycle. In these
stages, target costing becomes a tool for reducing cost of existing products. The search for
better, less expensive products should continue in the framework of continuous
improvement.
(a) ABC can be beneficial as a tool for target costing of existing products. Using ABC, a
Company can attack the root causes of costs (through cost driver analysis). Target
costing at the activity level makes opportunities for cost reduction highly visible.

(b) Consumer survey can give features they prefer in products priority wise. These
surveys help management do cost-benefit analysis on different features of a product
and then try to reduce costs on features that are not ranked highly.
(c) Target costing also provides incentives to move towards less expensive means of
production, as well as production techniques that provide a more even-flow of
goods.

14.5.2 Benefits of Target Costing

The following are the benefits of target costing:
1. The target costing provides detailed information on the costs involved in producing a
new product as well as better way of testing different cost scenarios through the use of
ABC.

2. Target costing reduces the development cycle of the product.
3. Target costing greatly increases the profitability of new products, through promoting
reduction in costs while maintaining or improving quality. Target costing also promotes
the requirements of consumers and therefore find better acceptance than existing products.

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