target costing

target costing - A Concept Paper On Target Costing an...

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A Concept Paper On “Target Costing an Effective Tool to Target Business” Submitted by Amit Patil (EGMP14A232) Pranab Das (EGMP14A235) Sailesh Golikeri (EGMP14A245) Executive Summary Until recently, companies have focused on satisfying a customer’s requirements. Most development personnel have viewed a product’s cost as a dependent variable that is the result of the decisions made about a products functions, features and performance capabilities. A product’s costs are often not assessed until later in the development cycle and the main driving factor to product development is to satisfy the customer’s requirement and often the product costs to be higher than the expected. In addition to that the cost structure for the product is largely locked in and cost reduction activities have limited impact in future. Hence the traditional cost approach ’cost plus pricing’ is inadequate for today’s liberalized and competitive environment where the competition typically moves to price gradually and the manufacturers need to match the lower prices of the global competition and still offer the highest quality products customers demand.
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Therefore the need has arisen to apply the technique named as target costing which has been widely used by Japanese firms since 1970s and which has recently received a considerable attention in the U.S.A. and European accounting literature. Target costing may serve as a solution when developing new products, minimizing costs through the optimal use of all resources along the entire supply chain. Target costing focuses less on cost and considers customer requirements to be the primary cost driver. Cost is seen as a result of the process whether focusing on a price-based approach, a value-based approach or an activity based cost management approach throughout the global supply chain. The target costing method works "backward" from traditional cost-plus methods and begins with a targeted sales" price for a product. This price is set based on what the customer is willing to pay. It considers not only the preferred current selling price but also [pic][pic] the later life cycle pattern of prices. This technique has key managerial implications. This paper considers these implications along with implementation guidelines. Examples of industries successfully using target costing are included. Companies excelled using the target costing enablers of value engineering or analysis, design for manufacturing, effective organizational structures, streamlined development processes, and actively engaging the supply chain. With strong supplier support, cycling through this process to reduce costs can be successful. Therefore companies look into multiple objectives for implementing target costing including reducing costs, understanding the supplier's cost structures, improving internal cost management, improving cost monitoring, and increasing cost accountability. Target Costing
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This note was uploaded on 04/09/2011 for the course ACCT 305 taught by Professor Taylor during the Spring '11 term at DeVry Chicago.

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target costing - A Concept Paper On Target Costing an...

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