Target cost

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Target cost
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Target cost is an economic category, meaning the value, expressed in money, of living labour and assets of a company used in a given period to manufacture products (S. Ahmeti,et all., 2013, p. 275-280). In other words, the target cost is the total amount in which a product must be manufactured to meet the needs of customers. A market-based target cost can be an excellent basis for establishing benchmarks, as it focuses on the future and requirements of customers and not on the company's internal design and technology capabilities (S. Ahmeti,et all., 2013, p.275-280). The target cost is the basis of the target cost method, which is a tool for strategic management accounting and strategic cost management, aimed at reducing the costs of a specific product throughout its life cycle. They are characterized by customer orientation, future orientation and interdisciplinary character. It is perceived as an instrument of strategic cost management. The decisive role is played by the product design phase. Costs are analysed throughout the product life cycle and compared with the customer's expectations of the product's functionality. It was established in the 1960s in Japan (S. Ahmeti,et all., 2013, p. 275).

Application

Target cost is used for cost control and mainly concerns the planning and design phase of the products to be introduced into production, as well as for product upgrades. The starting point is the sales price that can be achieved and includes the desired profit margin(W. Seidenschwarz, 2003, p. 437-453) . The purpose of the target cost calculation is to determine, through a gradual reduction, the amount of costs at which the product must be manufactured. Thus, it seeks to establish the costs to be incurred in order to make the product available to satisfy the needs of customers. A market-based target cost can be an excellent basis for establishing benchmarks, as it focuses on the future and requirements of the customers and not on the internal design and technology capabilities of the company (W. Seidenschwarz, 2003, p. 437).

Characteristics of target cost accounting

The following features are characteristic of this concept (R. Cooper 2002, p. 5-12):

  • The long-term achievement of a company's results is an objective for the cost orientation process,
  • decision variables occurring in the planning process carried out at the stage of product preparation are the parameters of the cost shaping process,
  • the subject of the cost shaping process are the assumed costs of the product,
  • Main assumptions in the target cost calculation,
  • The basic assumption in the cost calculation of the objective is that the planned result on the sale of the product and its planned market price remain unchanged, while the assumed costs of the product must be maintained at the level set by certain parameters (R. Cooper 2002, p. 5).

Comparison with other cost accounting concepts

The difference in the concept of target cost accounting from traditional cost accounting systems lies in the fact that (A. Lima,2016,  p. 11-25):

  • It allows for medium and long term cost impact of the product,
  • is integrated into the product life cycle,
  • is used to shape the production costs of products at the stage of their preparation,
  • is market-oriented and consumer-oriented,
  • takes into account human behaviour and enables the creation of an incentive system in companies,
  • it concerns the set-up costs of a product constituting a limit, an acceptable size guaranteeing the company's long-term viability,
  • The costs assumed for the product, its functional functions and components are explained using the cost function,
  • the cost of the product is the quantity explained by the market price and the expected long-term performance of the company (A. Lima,2016,  p. 25).

References

Author: Rafal Maslyk