Gone are the days when organizations used to design and produce the goods according to
their own specifications. Marketing of products took place after the manufacturing
process was completed. However, things changed dramatically when customers
started demanding products of their own choice and specifications. Product life cycles are getting
shorter and shorter, often to one or two years, sometimes to less than one year in high-tech industries
as consumers are demanding new and diversified products in short intervals.
It was in the 1970s when Japanese manufacturing industries faced the demand posed
by customers for more diversified products having short product life cycle, that the concept of
target costing took birth. Actually, the concept of target costing developed because of a need
for manufacturers to improve product cost management and product development. The failure
of traditional cost management system in product development, planning, and cost
management and the requirement of a forward-looking costing method has led to the development of
target costing. As part of the cost reduction exercise, the traditional method of cost accounting tends
to focus on costs involved in manufacturing a product, which includes the purchased materials
and sub-systems that go into it, plus the cost to convert them into the final product, i.e., labor
and overheads. Also, these "continuous improvement" techniques like, Kaizen, TQM, etc., also
proved to be effective only in the later parts of the product cycle, i.e., after the product is in
manufacture. However, the process of target costing begins with the definition of the product, setting the
target cost, finding ways to achieve the target, and then manufacturing the item at a competitive
cost during the life cycle of the product. The key element of the process is that it is a device
which continuously controls costs and manages profit over a product's life cycle. In short, it is a part
of a comprehensive strategic profit management system.
Emphasis on developing new products has grown more as a necessity to stay competitive, especially
with global competition, but it should be remembered
that the products must be profitable during their life
cycle before the decision is made to allow the product to
come to market. In such a situation, the adoption of
target costing as a part of product development process will be helpful as it takes cost as an input in
the process of product development, rather than an outcome of it. In the traditional costing system,
a major portion of the total costs of a product is established in the early phases of the
development cycle and most of the costs get locked in, by the time, the product reaches the
manufacturing stage. Hence, it becomes quite difficult to find substantial cost improvements in the later
phases of the product development cycle. Thus, the effectiveness of target costing can be realized, only
if it is implemented early in the product planning process. |
