Page 284 - DCOM206_COST_ACCOUNTING_II

Unit 14: Emerging Concepts in Cost Management

Notes
Challenges Which Automakers Faced to Target Costing

I. Lack of Understanding or Relevance

Nicolini, Tomkins, Holti, Oldman, and Smalley (2000) agree the target costing concept as
Japanese in origin. The Japanese name for the process Genka Kikaku expresses an overall
strategic approach to cost reduction. Even the continuous improvement or “kaizen costing”
is very much a Japanese approach that has found common usage in quality literature yet
the approach to costing is not a mainstream business term. The shortening life cycles
make the development, planning, and other phases of a product critical to understanding
its costs (Choe, 2002). While target costing has a straight forward logic, the implications in
practice are more difficult, particularly when the culture has previously embraced a cost-
plus approach to pricing. The cost plus approach is often quicker and does not involve an
iterative, inclusive approach to reducing the gap between current costs and target cost as
in target costing. The cost-plus approach also does not have a strong market orientation
that is a prerequisite for target costing. The term also is seen as limited to the accounting
domain and traditionally accountants have not been used to implement production changes,
even though they have access to the cost data.
In addition to costs, automakers must understand what consumers really want and are
willing to pay for. In the traditional approach to new product development and cost-plus
pricing, the result is an array of over engineered products that do not meet the customer’s
needs and are incorrectly priced. Burscher and Laker (2000) call this flawed process an
Contd...

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