Japanese Target Costing

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Japanese Target Costing: A Historical Perspective
Patrick Feil, Keun-Hyo Yook, Il-Woon Kim
INTRODUCTION Target costing originated in Japan in the 1960s, though it remained a secret for years. Since the 1980s, however, when target costing was widely recognized as a major factor for the superior competitive position of Japanese companies, extensive efforts have been made to convey target costing to Western companies. Many large companies in North America and Europe have tried to adopt target costing to enhance their cost management and, thus, increase their competitiveness. Consequently, many variations of target costing have been developed and are being used in different countries. Since target costing, like many other management practices and philosophies, is environment-specific, it is not surprising to see these variations in practice. Even though many published articles have greatly contributed to the wider use of target costing, most of the articles have dealt with only one specific aspect of target costing, and some have caused misconceptions about Japanese target costing. These misconceptions may result from the limited exposure of some of the authors to the holistic approach of target costing in Japan. THE ORIGIN OF TARGET COSTING A retrograde approach for determining product costs, which is one of the most important features of target costing, can be found as early as the beginning of the last century at Ford in the United States and in the development of the Volkswagen Beetle in Germany in the 1930s. At Volkswagen, in order to meet the price goal of DM 990, alternative technical solutions were weighed on the basis of cost considerations (Rösler, 1996). Yet a full-fledged target costing approach began during the period of scarce resources after World War II. During this time, Americans created a concept of maximizing desirable product attributes while at the same time minimizing product costs (Leahy, 1998). The technique became known as “value engineering” and was subsequently adopted by Japanese companies in order to withstand stiff competition within Japan. In the 1960s, value engineering was combined with the idea of influencing and reducing product costs as early as possible during the planning and development stages of a product (Buggert & Wielpütz, 1995). The first use of value engineering in Japan—known as “genka kikaku”—occurred at Toyota in 1963, though it wasn’t mentioned in Japanese literature until 1978 (Tani et al., 1996). Later “genka kikaku” was translated into “target costing,” the term now used throughout the world. Rösler (1996) did etymological research to clarify the derivation of the term “target costing” from Japanese language, which is described in Figure 1. Even though Kato (1993) criticizes the use of “target costing” as a translation of “genka kikaku,” the term has been generally accepted in the Western world. At the annual meeting of the Japan Cost Society in 1995, the official name was made “target cost management” on the grounds that “target costing” was too vague and did not convey the true meaning of “genka kikaku.”

Patrick Feil is a member of the executive board of lastminute.de in Germany in charge of finance/controlling and marketing/communications. Keun-Hyo Yook is a Professor of Accounting at Pusan University of Foreign Studies in Korea.. Il-Woon Kim is a Professor of Accounting and International Business at the University of Akron in Akron, Ohio.


International Journal of Strategic Cost Management/Spring 2004

Japanese Target Costing

Figure 1. The Origin of Target Costing

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Ki -






Target Costing
Source: Rösler, F. (1996), Target Costing für die Automobilindustrie, Wiesbaden 1996. (English translation has been added by the authors.)

THE DEFINITIONS OF TARGET COSTING Apparently many Japanese scholars do not themselves agree on the exact meaning of “genka kikaku.” There are a number of...
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