Target costing

The target costing (also retrograde calculation, English: Target Costing and Target Pricing ) is due to their strong customer focus less an instrument of many enterprise -centered controlling, but rather a holistic management method, which has proven to be a strategic decision support competitive markets.

The strength of the target costing is especially evident in the development, differentiation and diversification of complex products and systems that are manufactured in medium-sized batches. When complete new concepts of products, the target costing is less effective, as well as the management easier but produced in mass production products. By Target Costing is an attempt to realize a customer orientation, both in terms of price and in terms of required customer-specific product properties and product features. The concept was established in the Japanese economy in the 1970s and learned particularly in the 90s a broad theoretical foundation in the Western Business Administration.

• 4.1 advantages
• 4.2 disadvantages
• 4.3 Employees effect

Origin

The basic idea of ​​target costing can be traced back to the thirties to the design of the Beetle by Volkswagen. Genka kikaku (原 価 企 画) was developed in 1965 by Toyota and has been used since the 70s in Japanese companies. Theoretically, the concept was first discussed under the term target costing in the 70 years of Japanese scientists Michiharu Sakurai, Toshiro Hiromoto and Masayasu Tanaka. The first German economists who dealt with this issue, Péter Horváth were ( 1993, Target Costing ) and Werner Black Silk ( 1993, Target Costing: Market- oriented target cost management). A further development of the concept represents the Kaizen Costing

Basic concept

• The target costing answers the question " Can you charge a product? " Based on a retrograde calculation. It differs from traditional cost management that the " cost-plus - bill" (English: cost - plus), so cost profit margin = offer price, according to the question " What is going to cost a product? " applies.

• In order to calculate retrograde, is at the beginning of the process, usually a market research measure that a " competitive market price " (English: Target Price ) and product preferences of potential customers is determined.

• (: Target profit English) subtracted from customers or target price, the target profit margin. This results in the maximum allowable cost (English: Allowable Costs) arising to reach the target profit. These " allowable costs " are those projected in the company determined standard cost (English: drifting costs ). Faced Since the standard cost of a company are generally higher than the " allowable costs ", target costs are fixed, the business in the collaborative process with the help of other instruments are to be achieved.

• It is the guarantee of success of this system that are already present at the beginning of the product development phase for the employee -binding cost targets with steuerndem character, which can be significantly influenced there. In addition, a weighting of the costs is made with respect to the importance of the different product characteristics, and thus determines whether a product component or product function is developed, there is still or increase in value on the determination of the required preferences. (At this complicated topic, please consider the application example ).

Phases of Target Costing

In the economic literature there are several approaches to subdivision of the phases of the process of target costing. As an illustrative example of the three-stage approach ( target costs down, splitting and achievement ) used.

Target cost setting phase

Purpose of target costs down is to determine the total cost of a product that may be caused in the company. The determination of the amount of the target cost of the market situation and the company's strategy depends. In the pure form and in the relevant literature is recommended that the target cost equate the allowable costs, ie to pull the market in the company (market into company). This method is most commonly used but loud incoming empirical verifications neither in the German nor in the Japanese economy. The other approaches are several reasons an application in practice. For example, the Market -into -company process is poorly applied in high-grade product innovation, as customers the benefits of the product often can not be expressed in monetary terms. The other approaches are much more frequently chosen because let the requirements of the market into company little room for the developers involved in the development process. To be determined by the other methods target cost, which lie between the standard cost and the allowable costs. This cost reduction on the part of development is ensured with realistic goals.

Other methods:

• The out-of -company approach determines the target costs on the basis of technical and economic potential of the company. The target costs are therefore very close to the standard cost.
• The Into -and-out -of -company approach combines market into company and Out of Company.
• The out-of- standard - costs approach assumes lowering haircuts on the standard cost.
• The out-of- Competitor approach derives the target cost from the cost of competition ( for example, by benchmarking).

Target cost splitting phase

In this phase, the total target costs are broken down to a certain level in order to effectively vote in the subsequent phase of the target cost achievement of the target costs and can achieve. The target cost splitting has a very high conceptual importance for the application of target costing for two reasons. Firstly, enter the target cost from a realistic picture of the resource- moderate use of functional areas in the company. On the other hand, the problem is, at the same time ensure product functionality through a more reasonable allocation of resources, which is in accordance with the customer's wishes. The cost splitting can be done in components and function level. The results can be displayed graphically on the basis of a target cost control chart. This customer- rated benefits the standard costs are compared with each component. The following is an illustrative example to explain.

Example of use

• Customers of a car brand will be asked which characteristics of the vehicle are crucial for them. The result is that 50 % of the value is defined by the performance, 30 % by the sound and 20 % by the driving comfort.

• The market study results in an acceptable price for the car of 11,000 euros. For a fixed return of 10 % gives the total allowable costs of 10,000 euros. Consequently, the price is for the power to 5,000 euros, the noise is the customer worth 3,000 euros and 2,000 euros still driving comfort.

• The development team now determines that the motor has a 50 % stake in power to 40 % of the noise and to 10% on driving comfort. The chassis is responsible for the remaining shares.

• For the developers, this means that the engine to build at a cost of 3,900 Euro () per piece (including the development cost - see full- cost accounting).

• The aim is that the products or services as well as possible be adapted to the customer requirements before investment decisions are made, which are difficult or impossible to revision and sunk costs (English: sunk costs ) may result.

Target cost achievement phase

The success of target costing is particularly in the phase of goal achievement cost, in a well-rounded and balanced, market-driven and innovative concept is generated, with the Japanese economy and, ultimately, target costing was successful. This success requires that the person in charge in the target costing process are the necessary tools and methods to achieve the cost targets available. These cost information tools are required that deliver based on low input information in the early stages of the product innovation process meaningful information. These tools or instruments to achieve target costs, which have a differing effect on the analysis, planning and implementation phase, are many and can have technological, produkt-/prozessbedingten or organizational character.

Assessment

The main advantages and disadvantages of target costing are:

Benefits

• Early influences in the product lifecycle

The necessity of cost management from the beginning results from the realization that substantial proportions ( about 85 % ) of the total costs over the life cycle decisions already in the early stages are defined. Manages a company in advance to manage instruments and to include the market requirements in the product development process, there are large potential for cost reduction, which need not necessarily be accompanied by a quality reduction.

• High quality with falling average costs

Not only many Japanese companies create it with target costing to reduce their average costs while increasing quality constant. To avoid failure, the corresponding frame must necessarily be created for an adequate development of the concept.

Disadvantages

• Use in radical product innovation

The question with which accuracy and reliability of strategic market price, especially in highly innovative products, can be determined in advance, is not yet sufficiently answered.

• No exact scientific limit

Furthermore, there is no clear scientific definition of the stages of target Costings. The science discussed earlier models that can not enforce the practice or wants.

Employees effect

Ambivalent is considered the employee Effect: The target costing can have a reorganization within the company result. For example, a particular task may ( for example, a " motor at a cost of 4,900 euros " ) are in different units, eg, work in different countries provided simultaneously in a multinational company. The effect on the employee was of Grindt (1997) as a constant seen movement of the " bidding and undercutting ". Employees are through this reorganization of work, Cooper ( 1998) speaks of a new " concept of corporate rule ," related to each other in competition. Employees are encouraged to take entrepreneurial thinking and are after Glißmann (2001 ) in a process of " self-reinforcement and self-acceleration ": - a cost-effective offer of a unit of the company is forcing any other unit for cost-effective actions of the other units - the faster a unit reaches the result, the faster it must reach others. This increases the pressure on the staff, but shall clearly so free resources.