Target costing

Topics: Cost, Cost accounting, Management accounting Pages: 59 (13159 words) Published: February 17, 2014
Statements on Management Accounting
STRATEGIC COST MANAGEMENT

TITLE

Implementing
Target Costing

CREDITS
Implementing Target Costing was approved for
issuance as a Statement on Management Accounting
by the Management Accounting Committee (MAC) of
the Institute of Management Accountants (IMA® IMA
).
extends appreciation to the Society of Management
Accountants of Canada (SMAC) for its collaboration in
creating this SMA and to Robert A. Howell, Ph.D., president of Howell Management Corporation, who drafted the manuscript.

IMA thanks the Consortium for Advanced
Manufacturing-International (CAM-I) for their support in
the development of this SMA. IMA is also grateful to
the members of the Management Accounting
Committee for their contributions to this effort.

Statements on Management Accounting
STRATEGIC COST MANAGEMENT

Implementing Target Costing
TABLE OF CONTENTS
I.
II.
III.
IV.
V.
VI.

Rationale . . . . . . . . . . . . . . . . . . . . . . . 1
Scope . . . . . . . . . . . . . . . . . . . . . . . . . 2
Defining Target Costing . . . . . . . . . . . . . .2
Objectives of Target Costing . . . . . . . . . . .5
The Role of the Management Accountant .6
The Target Costing Process . . . . . . . . . . .8
Developing the Target Cost . . . . . . . . .9
Realizing the Target Cost . . . . . . . . . .13
Monitoring the Target Costing Process 15
Enhancing Target Costing with Kaizen
Costing . . . . . . . . . . . . . . . . . . . . . . .16
Repeating the Target Costing
Process . . . . . . . . . . . . . . . . . . . . . . .16
VII. Target Costing Process Tools . . . . . . . .17
Market Assessment Tools . . . . . . . . .17
Industry and Competitive Analysis . . .18
Reverse Engineering . . . . . . . . . . . . .18
Financial Planning and Analysis . . . . .19
Product Cost Analysis . . . . . . . . . . . .19
Cost Tables . . . . . . . . . . . . . . . . . . .20
Value Engineering . . . . . . . . . . . . . . .21
Quality Function Deployment . . . . . . .21
VIII. Management Accounting Challenges . . .21
IX. Conclusion . . . . . . . . . . . . . . . . . . . . .23
Appendix: Case Study
Glossary
Bibliography

Exhibits
Exhibit 1:
Exhibit 2:
Exhibit 3:

Exhibit 4:

Price/Cost Relationships in a
Competitive Environment . . . . . . .4
Various Definitions of Target
Cost . . . . . . . . . . . . . . . . . . . . .11
The Relationship of Committed and
Incurred Costs to the Product
Development Cycle . . . . . . . . . . .14
Relating Target Costing and
Kaizen Costing Across Two
Generations of Products . . . . . . .17

STRATEGIC COST MANAGEMENT

I . R AT I O N A L E
Businesses have a number of objectives, including satisfying customers with high-quality goods and services, quickly and on time; achieving high
levels of market penetration; providing a good
working environment for employees; and being
financially successful. The long-term financial
success of any business depends on whether its
prices exceed its costs by enough to finance
growth, provide for reinvestment, and yield a satisfactory return to its stakeholders. If there are few competitors, and if demand exceeds supply,
it may be possible to simply mark up costs to
establish a price that yields a sufficient profit.
However, as competition increases, and supply
exceeds demand, market forces influence prices
significantly more. To achieve a sufficient margin
over its costs, a company must manage those
costs relative to the prices the market allows or
the price the firm sets to achieve certain market
penetration objectives. In the context of these
characteristics, the practice of target costing has
evolved.
Following World War II, many North American companies grew quickly because of the pent-up demand of the war years, the reconstruction of
Europe and the Pacific Rim, and rapid population
growth. Strong demand—and often few
competitors—permitted these companies to
remain profitable and grow by offsetting cost...
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