Page 281 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes lean competitors that reacted in a very short time. Although the new product design stage
offers significant reduction opportunities for target costing process, Shank and Fisher
(1999) argues that target costing might be applied to existing products and also at the
manufacturing stages of the product life cycle. To this end, target costing may provide
significant benefits even for those automakers that did not have an effective cost
management system. Basically the major characteristics or advantages of target costing as
mentioned in are listed below:
1. Target costing will provide management methods and analytical techniques for
developing new products and services whose costs support strategic objectives for
market position and profit.
2. New product’s costs will be defined from the customer’s viewpoint; they will include
functionality, cost of ownership and manner of delivery.
3. Target costing is a critical component of new product development teams and
concurrent engineering.
4. Target costing will incorporate as wide a range of costs and life cycle phases for the
new product or service as can be logically assigned and organisationally managed.
5. Target costing will provide analytical techniques to indicate where cost reduction
efforts on parts and processes will have most impact, and where commonality and
simplification can be increased.
6. The quality of cost data will be consistent with the responsiveness and level of detail
required at various development phases. The system will use the logic and benefits
of activity-based costing

7. The achievement of market-driven product attributes will be protected from cost
reduction ambitions.
8. Targets for product cost will be set for various life cycle phases in development and
production.
9. Target costing will aim for appropriate simplicity, relevance and ease of use by new
product development teams; it avoids unnecessary complexity of language and
time consumption in cost assessments.

Impact of Target Costing on Profitability in Automotive Industry
Target costing can have a startlingly large positive impact on profitability for automakers,
depending on the commitment of management to its use, the constant involvement of cost
accountants in all phases of a product’s life cycle, and the type of strategy which automakers
follow. Target costing improves profitability in two ways as follow:

First: It places such a detailed continuing emphasis on new product costs throughout the
life cycle of every product that it is unlikely that an automaker will experience runway
costs; also, the management team is completely aware of costing issues since it receives
regular reports from the cost accounting members of all design teams.

Second: It improves profitability through precise targeting of the correct prices at which
the automaker feels it can field a profitable product in the marketplace that will sell in a
robust manner. This is opposed to the more common cost-plus approach under which an
automaker builds a product, determines its cost, tacks on a profit and then does not
understand why its resoundingly high price does not attract buyers. Thus, target costing
results not only in better cost control but also in better price control.
Contd...

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