Target Costing

Target costing in an approach that has been used very effectively by the Japanese to focus cost control efforts where they are most effective, and communicate back through the organisation the strategic cost/function mix required for success in the market. Target costing relies on an overview of the entire product life cycle from design, prototyping, and early production, to mature mass-production and gradual decline in demand. It seeks to ensure that improvements in efficiency are achieved at all stages. This is linked to an overall marketing strategy which relies on market penetration at the early stages, based on a target price set at a level to achieve a high volume of sales and sustain high volume production. With high volume achieved, economies of scale, continuous improvement programmes and learning effects are used to achieve further cost efficiencies and thus yield good profits.

Project Orientation

Clearly such an approach cuts across the traditional functionally segregated, periodic accounting control system. It is project oriented and requires considerable horizontal communication and teamwork. It also relies for its success on an effective means of predicting quite precisely, what the future costs of various design and manufacturing alternatives will be, adjusted to reflect the cost improvement and learning capabilities that will be expected from achieving high-volume production. This requires a very detailed knowledge of the cost consequences of past design and process decisions to be accumulated and made accessible to design teams.