Page 282 - DCOM206_COST_ACCOUNTING_II

Unit 14: Emerging Concepts in Cost Management

Is Automaker Ready for Target Costing? Notes
The seven questions below are excerpted from the book “Target Costing,” by Shahid L.
Ansari and Jan E. Bell, (Irwin Professional Publishing, Chicago, 1997). They can help
reveal how prepared automakers are to launch on a target costing program. If the automaker
answers “no” to most of these questions, then it should take a harder look at more serious
preparation before attempting to launch a target costing program.
1. Have the automaker made the reason for target costing clear? Is its connection to its
business strategy clear?
2. Does top management support target costing?
3. Is this the right time to introduce target costing?
4. Are people ready for change?

5. Is there a readiness to accept the key principles of target costing?
6. Is the organisation ready to commit the necessary resources?
7. Are all management levels ready to respond quickly to the changes target costing
will bring?
Process of Target Costing in Automotive Industry
Process of target costing for new product design in automotive industry is described in the
following steps:
1. Consider strategic and financial goals: Top management sets long-term goals for
the complete corporation and new product should be designed to help the automaker
to achieve these goals.
2. Determine the customer attributes or demands: This process involves conducting
thorough automotive market analysis and customer surveys to determine what the
customer’s needs and demands are for a given product.
3. Consider costs and processes while designing: This step must result in the design
specification of the new product. The major tools used to obtain the design
specification of a new product are (a) Pugh Method and (b) QFD.

4. Determine the target price: Target price is the price which a customer is willing to
pay for the new product. Thorough automotive market analysis must be conducted
to determine the target price.
5. Determine the target cost: Target cost, also known as the allowable manufacturing
cost, is calculated by subtracting the profit required (ROS can be used to determine
the profit required from the new product) from the target price.
Target Cost = Target Price – Desired Profit
6. Determine the drifting cost and product feasibility: Drifting cost, also known as the
actual cost of manufacturing is the present cost of manufacturing the new product
and this is calculated with the help of the engineering department. It is also analysed
to see if all the desired functions can be provided in the new product. A good costing
system like ABC (Activity Based Costing) will assist in determining accurate costs.

7. Process Improvements: If the designed product yields the required profit, the new
product can be manufactured. If the new product does not yield the required profit,
the new product needs to be re-designed or the process of manufacturing should be
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