Target Costing

 It is not very difficult to understand the meaning of the target costing. As a layman, we can easily guess what the target costing is? So far as the meaning of target costing, it is a cost  where target is already set . But it’s not sufficient enough for it. We need to dig down even more deeply.

It was originated in Japan in late 1960s and remained secret for many years. But later in 1980s, it was started gaining popularity among the Japanese companies. And gradually, it then found the way to western countries. Since then many large companies adopted the target costing method and enhanced their cost and management system.

Akio Morita is the first person who has been credited with pioneering this cost approach when he led the development of Walkman as portable, pocket able and affordable musical gadget.

 Target costing is actually based on a philosophy that what customer wants and how much he is willing to pay for. Therefore, the price of the product is found from the market and then deducts the desired profit margin out from it and arrives at the target cost. For example Rattan Tata’s NANO for which a initial price was fixed Rs. 1, 00,000. Then the engineers were worked back on this targeted cost and launched the dream car NANO. It is a “price-led costing” called by Peter Drucker.

Target cost = target price (price customer willing to pay for) - profit margin

Above it was understood that what target costing is. But the real question is that how it is developed? Basically, there are some steps involved in developing the target cost. Here we go,

·         customer requirements

·         product planning

·         Concept design

·         Basic design

·         Detailed design

·         Manufacturing preparation

Customer requirements: At this first step, we try to find out the perception of the customer for the product characteristics and his expectations about the quality, price, performance and technology of the product.

Product Planning: At this step, we try to discover and plan that how the product is marketed, manufactured and what would be the primary performance specifications. We also plan that what would be the cost target, profitability, and volume of the product.

Concept design: At this stage, we design the basic concept of the product and assign the cost targets accordingly. We also evaluate whether the basic concept of the product which has been drawn fit the cost target or not.

Basic design: At this step, we construct the general design of the product keeping in mind the cost targets and evaluate whether this general design is fit with the cost target or not on the basis of some rough cost estimation.

Detailed design: At this step, we would move little bit manufacturing specification of the product on the basis of above concept design and basic design. The emphasis is given for the most to the cost targets. Then the drawing of manufacturing specification comes under its way.

Manufacturing preparation: At this final stage, we design the manufacturing system for the product which include tools, production methods to be adopted and processes for the product while cost targets are kept in mind and compared at every bit of additional workings.

Therefore, the target costing is a new way of understanding the customer demands and translates them into products. It has opened new doors for manufacturing companies to combat the competitiveness. Not even companies, but also customers are getting the products according to their specification that they really looking for. Thus,  Target costing has left the traditional method of manufacturing far behind.