Target Cost Management
Article Review: Target Cost Management
An article by Louise Ross puts target costing in effect with agricultural and the farming industry, explaining how this system may already be partially in use. Louise Ross provides evidence of the advantages and disadvantages of target costing within the food supply chain.
According to Ross, participants in the food supply chain were already using some form of target cost management, but the system was not formalized into specific aspects. Ross (2008) refers to target costing as not a “specific management technique”, but a more general idea of “target cost management” as seen as a management philosophy and “market-driven approach”. Ross’s research has revealed “evidence that the contracts between producers and various corporate partners…are based on cost targets” (Ross, 2008).
Within the farming industry, there are several components involved between the actual farm where a product is grown, to the time it is present in a store. A value needs to be established in what the market will pay for the product, along with the profit needed to land at the target cost of the product. Once established, the processes are evaluated to see whether the target is achievable. According to Ross (2008), “once committed to a project, they (management) continually monitor and re-engineer processes to reduce costs.” In short, you figure in the market value of the product, desired profit, and change components to cut costs to reach the target cost. This may sound simple, but Ross continues to explain that some industries are not compatible with a target costing system, including the farming industry.
Typically, this business type was not seen as a manufacturing company, or even a commercialized business, but a family oriented business. Research has been done to show that these farming “producers” have now become focused on profits and margins where key overhead components play a major part in the way they determine prices
An article by Louise Ross puts target costing in effect with agricultural and the farming industry, explaining how this system may already be partially in use. Louise Ross provides evidence of the advantages and disadvantages of target costing within the food supply chain.
According to Ross, participants in the food supply chain were already using some form of target cost management, but the system was not formalized into specific aspects. Ross (2008) refers to target costing as not a “specific management technique”, but a more general idea of “target cost management” as seen as a management philosophy and “market-driven approach”. Ross’s research has revealed “evidence that the contracts between producers and various corporate partners…are based on cost targets” (Ross, 2008).
Within the farming industry, there are several components involved between the actual farm where a product is grown, to the time it is present in a store. A value needs to be established in what the market will pay for the product, along with the profit needed to land at the target cost of the product. Once established, the processes are evaluated to see whether the target is achievable. According to Ross (2008), “once committed to a project, they (management) continually monitor and re-engineer processes to reduce costs.” In short, you figure in the market value of the product, desired profit, and change components to cut costs to reach the target cost. This may sound simple, but Ross continues to explain that some industries are not compatible with a target costing system, including the farming industry.
Typically, this business type was not seen as a manufacturing company, or even a commercialized business, but a family oriented business. Research has been done to show that these farming “producers” have now become focused on profits and margins where key overhead components play a major part in the way they determine prices
References: Louise, R. (2008). Target Cost Management. Retrieved on September 26, 2011 from http://findarticles.com/p/articles/mi_qa5386/is_200810/ai_n31110171/?tag=rel.res3 Accounting: What the Numbers Mean, by Marshall, McManus, and Viele, 9th edition, McGraw-Hill / Irwin, © 2011. Marshall, D. H., McManus, W. W., Viele, D. F. (2011). Accounting: What the numbers mean. (9th Ed.). McGraw-Hill/Irwin.