Page 283 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes improved to yield the required profit. Some tools like value engineering can be
used to associate costs to components or functions in order to determine their cost
efficiency. The components or functions that are cost inefficient should be redesigned
to reduce costs. If the products are found not to meet the financial profit requirements,
they should be abandoned.
8. Implementing/evaluating long term effects: It is essential to make sure that the new
product will yield the required profits through its complete life and the product mix
must be regularly adjusted to meet the strategic goals of the automaker. The process
of target costing is illustrated in following figure and it is based on the cardinal rule,
“If we cannot make the desired profit we should not launch for the new product.”

Factors Influencing Target Costing Process

Target costing has a number of implementation challenges include: lack of understanding,
cultural barriers against cross-functional cooperation; organisational barriers to team
oriented work (difficult to achieve in a functional structure); and a perceived irrelevance
about the effects. Still other barriers may include the organisations information systems
and its lack of total system integration. To share cost reductions, supply chain partners
must be able to share initial cost and production data.
Contd...

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