Target costing originated in Japan in the 1960s, where it is know as Genka Kikaku. It is such a costing system where the management consider it as a profit planning system.
Target costing is an activity which is aimed at reducing the life-cycle costs of new products, while ensuring quality& customer requirements, by examine all possible ideas for cost reduction at the product planning, research and development, and the prototyping phases of production.
Target costing is an important tool because it promotes cost consciousness and focuses on profit margin, both of which strengthen an organisation’s competitive position. It is not a technique that attempts to slash cost by trimming functions or closing departments; it is a steady and never-ending process to make sure that costs are always kept within to a minimum.
The target costing approach is a vital costing tool because research has shown that up to 90 per cent of costs are ‘built in’ at the product’s design stage. For example, the design stage sets the following.
• The design specification of the product including extra features.
• The number of components is incorporated in the product.
• Design of components . These should be designed for reliability in use and ease of manufacture. Wherever possible standard parts should be used because they are proven to be reliable and will help reduce stock handling costs.
• Type of packaging required. This includes product packaging and packing per case and per pallet. The aim is to protect the product and to minimise handling costs by not breaking pallets or cases during distribution.
• The number of spare parts that need to be carried. This ties in with the number of components used. Parts must sometimes be held for up to 15 years or so. They may be made while the product is still in production and stored for years, which is costly. The alternative is to disrupt current production to make a small batch of a past component, which is very costly.
CAclubindia
