Target Costing

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1Introduction1
1.1Definition of Target Costing1
1.2Historical Background2
1.3Objectives of Target Costing3
2Target Costing Principles4
2.1Price Led Costing4
2.2Customer Focus4
2.3Design Focus5
2.4Cross-Functional Involvement5
2.5Life Cycle Cost5
3Distinguishing Target Costing from Traditional Cost Management6 4Setting up a Target Costing Management8
4.1Fundamental Work8
4.2Systems of Managing Target Costing8
4.3Principles of Target Costing9
4.4Procedures of Target Costing9
4.5Risk of Target Costing11
5Three Forms of Target Costing13
5.1Price-based Target Costing13
5.2Value-based Target Costing14
5.3Activity-based Target Costing14
5.4Alternative Target Costing Methods16
6Case Study X-Bikes GmbH19
6.1Initial Situation19
6.2Dealing with the Crisis21
6.3Market Analysis24
6.4Reverse Calculation27
6.5Target Cost Matrix & Target Cost Control Diagram30
7Conclusion34

Figure 1: Target Costing Key Principles4
Figure 2: ABC Monitors15
Figure 3: German Bike Market Overview19
Figure 4: Quantity of Bikes Sold20
Figure 5: Sales of Business Segments20
Figure 6: EBIT of Business Segments21
Figure 7: Reverse Calculation Structure28
Figure 8: Cost Plus Calculation28
Figure 9: Cost by Type of Bicycle28
Figure 10: Reverse Calculation29
Figure 11: Target Costing Index Matrix30
Figure 12: Target Cost Control Diagram31
Figure 13: Allowable Cost per Items According to Market Price32 Figure 14: Allowable Cost only Considering Larger than 1 TCI33 Introduction

Increasing global competition has made it important for every firm to constantly improve on their production processes in other to enhance their cost control and increase their competitiveness. Target costing is an important approach that helps us to recognize the features to be improving on and help us to set our target for designing and cost control. Target costing is simply a cost management tool that is used to reduce a product cost at the development stage as well as to manage the profit margin of a firm. It is a market driven costing tool in that cost targets are set by considering customer requirements and competitive offering (Ansari et.al, 1997). Therefore, this paper is designed to explain the basis for target costing setting, its components as well as the benefits. This paper is sectioned into five major parts. The first part presents a brief introduction and definition of target costing, historical background, and the objectives of target costing. The second part deals on the key principles of target costing and the different between traditional cost management and target costing. The third section describes the forms of target costing while the fourth and the fifth part will be discussing on the management of target costing project and the case study.

1 Definition of Target Costing

Different authors have defined target costing in various ways. Below are some definitions of target costing from different viewpoints?

(Cooper and Slagmulder, 1997) defines target costing as a structured approach to determine the life-cycle cost at which a proposed product with specified functionality and quality must be produced to generate the desired level of profitability over its life-cycle when sold at its anticipated selling price.

(Shank and Fisher, 1999) defines target costing as a set of management tools and methods designed to direct design and planning activities for new products, provide a basis for controlling subsequent operational phases and ensure that products achieve given profitability targets throughout the life-cycle.

(Ansari et.al, 1997) defines target costing as a system of profit planning and cost management that is price led, customer focused, design centered, and cross functional. Target costing initiate cost management at earliest stages of product development and applies it throughout the product life cycle by actively...
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