Table of Content
Definition of Target Costing
Objectives of Target Costing
Target Costing Principles
Price Led Costing
Life Cycle Cost
Distinguishing Target Costing from Traditional Cost Management
Setting up a Target Costing Management
Systems of Managing Target Costing
Principles of Target Costing
Procedures of Target Costing
Risk of Target Costing
Three Forms of Target Costing
Price-based Target Costing
Value-based Target Costing
Activity-based Target Costing
Alternative Target Costing Methods
Case Study X-Bikes GmbH
Dealing with the Crisis
Target Cost Matrix & Target Cost Control Diagram
Figure 1: Target Costing Key Principles
Figure 2: ABC Monitors
Figure 3: German Bike Market Overview
Figure 4: Quantity of Bikes Sold
Figure 5: Sales of Business Segments
Figure 6: EBIT of Business Segments
Figure 7: Reverse Calculation Structure
Figure 8: Cost Plus Calculation
Figure 9: Cost by Type of Bicycle
Figure 10: Reverse Calculation
Figure 11: Target Costing Index Matrix
Figure 12: Target Cost Control Diagram
Figure 13: Allowable Cost per Items According to Market Price
32 Figure 14: Allowable Cost only Considering Larger than 1 TCI
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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