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The fundamental objective of target costing is to manage the business to be profitable in a highly competitive marketplace. In effect, target costing is a proactive cost planning, cost managementand cost reduction practice whereby costs are planned and managed out of a product and business early in the design and development cycle, rather than during the later stages of product development and production.
Although the ideas of target costing were also applied by a number of other American companies including BoeingCaterpillarNorthern Telecomfew of them apply target costing as comprehensively and intensively as top Japanese companies such as NissanToyotaNippondenso.
It did not receive global attention until late s to s when some authors such as Monden Sakurai Tanaka and Cooper  described the way that Japanese companies applied target costing to thrive in their business IMA With superior implementation systems, Japanese manufacturers are more successful than the American companies in developing target costing.
Process of target costing[ edit ] The process of target costing can be divided into three sections: Market driven costing can go through 5 steps including: Only realistic plans are accepted to proceed to the next step.
Product mix is designed carefully to ensure that it satisfies many customers, but also does not contain too many products to confuse customers. Company may use simulation to explore the impact of overall profit objective to different product mixes and determine the most feasible product mix.
Target selling price, target profit margin and allowable cost are identified for each product. Target selling price need to consider to the expected market condition at the time launching the product.
Firms might set up target profit margin based on either actual profit margin of previous products or target profit margin of product line. Simulation for overall group profitability can help to make sure achieving group target.
Subtracting target profit margin from target selling price results in allowable cost for each product. Allowable cost is the cost that can spend on the product to ensure meeting profit target if selling it at target price.
It is the signal about the magnitude of cost saving that team need to achieve. Product-level target costing concentrates on designing products that satisfy the company's customers at the allowable cost.
To achieve this goal, product-level target costing is typically divided into three steps as shown below. Since the allowable cost is simply obtained from external conditions without considering the design capabilities of the company as well as the realistic cost for manufacturing, it may not be always achievable in practice.
Thus, it is necessary to adjust the unachievable allowable cost to an achievable target cost that the cost increase should be reduced with great effort.
The second step is to discipline this target cost process, including monitoring the relationship between the target cost and the estimated product cost at any point during the design process, applying the cardinal rule so that the total target costs at the component-level does not exceed the target cost of the product, and allowing exceptions for products violating the cardinal rule.
For a product exception to the cardinal rule, two analyses are often performed after the launch of the product. One involves reviewing the design process to find out why the target cost was unachieved.
The other is an immediate effort to reduce the excessive cost to ensure that the period of violation is as short as possible. Once the target cost-reduction objective is identified, the product-level target costing comes to the final step, finding ways to achieve it.
Among the three aforementioned methods in achieving the target cost, VE is the most critical one because not only does it attempt to reduce costs, but also aims to improve the functionality and quality of products.
There are a variety of practical VE strategies, including zero-look, first-look and second-look VE approaches, as well as teardown approaches. In addition, simulation helps estimate results rapidly for dynamic process changes.
Factors affecting target costing[ edit ] The factors influencing the target costing process is broadly categorized based on how a company's strategy for a product's quality, functionality and price change over time. However, some factors play a specific role based on what drives a company's approach to target costing.
Factors influencing market-driven costing[ edit ] Intensity of competition and nature of the customer affect market-driven costing.TERRITORIES & CITIES OIL AND GAS FIELD 'DIGITAL TWINS'. The upstream oil and gas industry is pushing to apply digital technologies to exploration and production practices, yielding better business returns by optimizing processes and increasing efficiency.
Y. Monden, K. HamadaTarget Costing and Kaizen Costing in Japanese automobile companies Journal of Management Accounting Research, 3 (), pp. 16 - 34 Nishimura, Located in Bochum, Germany, 4ffCom AG is an industry leading and independent supplier of automated R&D and Conformance Test Solutions from HW to SW for .
Activity-Based Costing in the Hospitality Industry: Evidence From Greece adoption, and use of activity-based costing (ABC) in the hospitality industry. To this end, a survey was conducted with 85 firms of the Greek hotel sector with the use of questionnaires.
Research into product costing practices: a European perspective. European. Okumura Shoji, “Jidosha kogyo no hatten dankai to kozo” [The Developmental Stages and Structure of the Automobile Industry], in Gendai Nihon sangyo koza [Series on Contemporary Japanese Industry] ed. Arisawa Hiromi (Tokyo: Iwanami Shoten, );.
Target costing is an approach to determine a product’s life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired ashio-midori.com involves setting a target cost by subtracting a desired profit margin from a competitive market price.
A target cost is the maximum amount of cost that can be incurred on a product, however, the firm can still.