TARGET COSTING: AN INTEGRATIVE MANAGEMENT PROCESS.
In the traditional approach of cost management, the product costs are often not assessed until later during the product development cycle. Target costing, a technique developed by the Japanese follows a fundamentally different approach. The many U.S companies that rushed in to follow the Japanese technique have not been successful in doing so. This is because they overlooked the underlying processes that support and reinforce these techniques (Kato, 1995).
Target costing has three main goals,.
• Orienting products to customer affordability and market pricing.
• Target product costs as an independent variable.
• Aggressively working to achieving target cost during product and process development,(Kenneth, 1999).
Target costing holds a definite promise as it is future oriented, makes designers focuses on the cost implications of their design and helps to evaluate profitability even before the product is made (Kato, 1995).
TARGET COSTING PROCESS:.
The target costing process has three major activities,.
• Price projections.
• Profit plans.
• Manufacturing experience (Kato, 1995).
Price Projections: Many factors like product concept, attributes of target market, product life cycle costs, expected sales and competitors reactions affect or influence the selling price of a product. The managers have to evaluate each of these factors and set a target price at which they can sell a product. The life cycle costs of a product is equal to the sum of the acquisition costs, other related capital costs, training costs, operating costs, support costs and disposal costs ( Crow,1999). Another important factor for the manager to consider is to predict the competitors moves that it expects to make when the product is made available.
Target Profit: Before target costs can be derived, target profit must be set because.