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Target Costing
Factors affecting Target Costing
The factors influencing the target costing process is broadly categorized based on how a company's strategy for a product's quality, functionality and price change over time. However, some factors play a specific role based on what drives a company's approach to Target Costing.
Factors influencing Market-driven Costing[1]
Intensity of competition and nature of the customer affect Market-driven costing.[2] Competitors introducing similar products has been shown to drive rival companies to expend energy on implementing target costing systems such as in the case of Toyota and Nissan or Apple and Google.
The costing process is also affected by the level of customer sophistication, changing requirements and the degree to which their future requirements are known. The automotive and camera industry are prime examples for how customers affect target costing based on their exact requirements.
Factors influencing product-level costing[1]
Product strategy and Product characteristics affect product level target costing.
Characteristics of product strategy such as number of products in line, rate of redesign operations and level of innovation are shown to have an effect. Higher number of products has a direct correlation with the benefits of target costing. Frequent redesigns lead to the introduction of new products that have create better benefits to target costing. It has to be noted that the value of historical information reduces with greater innovation, thereby reducing the benefits of product level target costing.
The degree of complexity of the product, level of investments required and the duration of product development process make up the factors that affect the target costing process based on product characteristics. Product viability is determined by the aforementioned factors. In turn, the target costing process is also modified to suit the different degrees of complexity required.
Factor influencing component-level costing[1]
Supplier-Base strategy is the main factor that determines component-level target costing because it is known to play a key role in the details a firm has about its supplier capabilities.
There are three characteristics that make up the supplier-base strategy including the degree of horizontal integration, power over suppliers and nature of supplier relations.
Horizontal integration captures the fraction of product costs sourced externally. Cost pressures on suppliers can drive target costing if the buying power of firms is high enough. In turn, this may lead to better benefits. More cooperative supplier relations have been shown to increase mutual benefits in terms of target costs particularly at a component level.
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- ^ a b c Cooper, Slagmulder, Robin, Regine (1997). Target Costing and Value Engineering. Portland, OR, USA: Productivity Press.
{{cite book}}: CS1 maint: multiple names: authors list (link) - ^ Khandwalla, P. N., (Autumn 1972). ""The Effect of Different Types of Competition on the Use of Management Controls"". Journal of Accounting Research,.
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