In this study majorly discussed the matter of which are involved in industry and product development sector. For the last few decades the target costing methods were critically examined for its efficiency and necessity in decision making process by managerial accountants and managers operating in industrial sector, and the relevancy of this matter has been repeatedly mentioned widely in past empirical studies. Current research mainly based on secondary data available from relevant literature and primary data obtained through in-depth interviews with top management of companies operating in product development and industrial sectors. Moreover, the target costing methods which are implemented in industrial companies were mostly successful, but still there are a few difficulties and problems exist, which is not being so important to prevent its further use in the wide range of companies and organizations. In this regard, there are a few recommendations were highlighted, which are can be useful to waive some uncertainty around target costing practices.
It has been admitted by many researchers that implementation and adoption of target costing practices over industries have a relatively high level. The implementation of current practices mostly related to an unpredictable and intense competition environment. The main objective and aim of successful implementation and adoption of target costing practices is the cost reduction. While the target costing management process not only accountants are involved but also product development and design departments. Moreover, the team structures are mostly adopted organizational forms for target cost management, where several measures combine behavioral matters and experience in the development process of particular product.
1.2 Introduction
The targets costing is an effective approach to control and manage product costs and gross margins that works backward from the final price a consumer would pay for a particular product or service with a special set, determine product cost targets on the basis of product's expected gross margin and then manages the development process to achieve estimated targets. It differs from how a number of organizations and companies determine the product cost, where the management teams can establish targets according to experience and relevant historical data and after that set the final price including some margins percentage. Target costing is focused on consumer's value and plays a great role in financial decisions about a product made by development team. To achieve this successfully, a development team should consider how much extra a consumer able to pay for a specific attribute or level of performance, and what areas of the product can be over-performing or extremely difficult to produce, how to re-consider a design of current product making it less expensive and easier to produce, and how to cooperate with main suppliers to reduce costs. The critical point is to reconsider the assumptions about a product and directly ask consumers to guide on the product specifics that generate the most value and producers can deliver them more efficiently and monitor the process overall.
Major goal of current approach is high gross margins, firstly by product's material costs and direct labor cost reduction. One design achievement can be small number of parts, which particularly leads to inventory management savings throughout the supply chain. Similar practices lead to products that are easier to transition to producing, more effective and not difficult to maintain, which also reduces warranty, development, support and service costs. Eventually, current approach can also satisfy product consumers. By simplifying the products to reduce excess features and complexity, products made easier to use and maintain from the consumer's perspective. It can be beneficial according to lower support and service costs, and higher durability.
The target costing method developed of a necessity for producers to strengthen product development and product cost management. The traditional cost management, cost accumulation and allocation methods used for a long period and still predominant in the producing and services sectors have failed as tools for product planning, development and cost management. This is because they focus on the product's cost rather than on the expectations of consumers and the product design itself. Consequently, basic cost systems flood managers with accounting reports which mostly just overstating the cost of high-volume, understate the costs of low-volume, standardized products and customized products (Lockamy III and Smith, 2000).
In 1999, Cooper and Slagmulder determined three main stages of target costing:
Market price setting: At this stage, marketing team sets a target price for their product, and gives the development team a prerogative list of functions which will certainly deliver a product that the consumer willing to buy at the target price.
Product cost managing: The development team determines a target cost for particular product, which will meet expectations for gross margin of the organization. They start a process of product cost monitoring throughout the development cycle.
Part level costs and subsystem managing: Using existing products and competitive data as guides, the team prepares a "budget" for every major component and subsystem respectively. Then, the team works out a strategy for narrowing and closing any possible gaps between the target cost and expected costs. For the all period, the team repeatedly monitors both product level costs and subsystem to evaluate the progress of gap closing and address the problems that may arise.
These three stages make a complete focus on product cost throughout the product lifecycle that pulls together the entire development team. Firstly, Marketing is heavily involved in setting the target price and assisting the development team understands the value for parameter's performance and features. Manufacturing staff get involved early - in one case, as soon as the concept stage, to make a quick feedback on production processes alternatives and their costs. Suppliers and procurement usually get engaged to bring new ideas for narrowing and closing the inevitable gaps between targeted costs and projected product costs.
The necessity to modify product quality and productivity discussed in many organizations and companies implementing innovative cost management methods, such as target costing, activity-based cost management, just-in-time inventory management, kaizen costing, total quality management (Lockamy and Smith, 2000). Contrarily to cost or management methods, target costing highlighted as one of the most effective to reinforce product development, production management, selling costs and pricing .
Therefore, a particular overview of empirical literature and the need of further implementation of target costing practices in managerial process of companies and organizations involved in product development in industrial sector will be discussed in the first section of the current study. One of the main arguments in this research is to support and advice companies to strengthen the implementation of target costing practices in order to have broader understanding of the causes and behavior of costs generally. The next section discusses practical matters of target costing in industry enterprises. This research preliminary get used of secondary data available from relevant academic sources and in-depth interviews. It determines the main aspects of target costing practices focusing on its benefits. One of the important points of this study is to draw an attention to effectiveness of target costing practices in a whole managerial process and final decision making to reduce production costs. Furthermore, in the last section of the current research conclusion and recommendations will be drawn in order to prove the idea of target costing practices necessity and its usefulness in increasing company's profits.
1.3 Literature Review
The principles of target costing was defined by the Consortium for Advanced Manufacturing International as a set of management methods and tools created to (1) direct design and planning procedures for new products, (2) assure that products will gain the planned profitability targets throughout their life cycle, and (3) provide a basis for controlling subsequent operational stages (Cf. Shank, 1999). Cooper and Slagmulder identifies it as a process for assuring that a product launched with specified quality, functionality and finally sales price can be developed at a life-cycle cost that creates a good level of profitability (Cf. Lockamy and Smith, 2000).
The current process is design-centered and has a market driven focus, which, unlike the conventional cost management practices, allows companies to trade off functionality and quality pursuing target costs as a last arrangement. (Castellano et al, 2003)
It is focuses less on costs and more on consumer's needs. The main point is not "How much will the product cost?" but "How much can the product cost?" Karo describes target costing as a complete cost-reduction program, not a simple cost-reduction practice, but a complete, strategic profit management system. Horvath describes it as a part of the cost-management function for a product throughout its life cycle (Cf. Shank, 1999). The main point of current process is the planning matter, where various product factors, costs and others, are thought over the product's total life cycle. Consequently, it is considered as a cross-functional process and good strategic planning tool in some degree.
A subject that receives increasing attention in accounting literature is the use of cost in formation and cost management during product design (Anderson and Sedatole, 1998, Davila, 1999). The important matter for managing costs during designing the particular product is that after the product creation stage most costs have been 'designed' into the product and cannot be affected no more. One effective practice that can be implied for managing product costs in the design stage period is target costing (Kato, 1993; Ewert and Ernst, 1999). Target costing is importantly concerned with setting a target cost to be gained in the product development process, such that a adequate profit margin is accomplished when the product is distributed or delivered to its market. Moreover, in the relevant literature, target costing is considered as a strategic management accounting system, as it predominately arranged on long-term cost management possibilities (Chenhall and Langfield-Smith, 1998; Ewert and Ernst, 1999; Guilding et al., 2000; Tani, 1995).
In addition, necessary to mention that, Toyota generated the concept of target costing in the mid 1960s. Mostly it is implied in Japan than other countries of the world. Lockamy and Smith present that in the beginning of 1990s over 85 percent of Japanese assembly production companies has been using target costing, including all companies in the Japanese automobile industry but none in the other fields of industry, such as forestry or fishery (Lockamy and Smith, 2000).
Other countries in the world did not easily implemented and adopted target costing practices, though many organizations and companies implement certain parts of it. Hence it has been successfully adopted in U.S. Banham argues that in the year 2000 only about 70 U.S. firms utilized target costing. Of these, 80 percent were discrete-parts and finished-product producers, such as Boeing, Eastman Kodak, Caterpillar, and Daimler-Chrysler. A survey of those U.S. companies reveals favorable, although not exceptional, results from utilizing target costing. (Banham, 2000.) Peter Zampino, director of research at Consortium for Advanced Manufacturing -- International (CAM-I), reported that U.S. companies tend to implement target costing when they are in crisis mode. Therefore, U.S. companies conduced to have the opinion that in stable economic periods a company does not have a necessity in target costing (Banham, 2000). U.S. companies assumes the concept of cost management, and many utilize the practices presented in this study, but eventually many of them do not directly follow the straight target costing process and the cross-functional participation in product, manufacturing and supply chain planning procedures (Banham, 2000).
Finally, in relevant literature sources, target cost management and target costing are usually associated with Japanese companies. Empirical research into the practices of target costing has mainly been performed by Japanese researchers for the Japanese situation (Kato, 1993, Tani et al, 1994). Some attempts were developed to investigate the relevancy and occurrence of abovementioned in non-Japanese environment (Chenhall and Langfield-smith, 1998; Guilding et al., 2000; Horvath and Tani, 1997). One could expect that as the drivers for using such practices are not idiosyncratic to Japan (i.e., the aim to obtain a profit margin on products, under certain market circumstances), it can be definitely used in a non-Japanese environment, even though the particular application of such techniques may deviate from the specific Japanese approach.
CHAPTER 2
2.1 Research Methodology and Data Collection
A methodology has been developed that mainly focused on the implementation of cost management practices which have similarity with target costing matters and target costing overall. Current research was conducted as exploratory, to determine the adoption and occurrence of these practices in organizations and companies operating in Uzbekistan. Some organizations and companies are familiar with target costing matters, nevertheless there are still remain such organizations which make use of such techniques just similar to target casting, without the relevant understanding of its concept. In this regard, in order to assess if such organizations get used of this system, more clear description and background information of target costing has been given following the definition earlier.
The current research majorly based on the empirical investigation of the effective implementation of target costing methods in product development and industry sectors. Consequently, this study will mainly use a secondary data on managerial accounting procedures and target costing relevant literature; moreover number of in-depth interviews will be conducted to collect primary data. The organizations and companies operating in Uzbekistan are selected as a research sample and the top management of those companies as population respectively. Also it is crucial and useful to show how important could be target costing methods in product development process and profit planning. In this regard, considering abovementioned factors, the current study urges management, policymakers and other responsible persons to continue its immediate implementation.
2.2 Target Costing in Process
The target costing process is obviously consist from a several separate decisions and activities. It eventually starts with a product definition, its qualities and characteristics, and its estimated selling price. This is actually the most critical point in the current process. The particular product will finally define the costs necessary for production and selling this product.
Butscher and Laker presents this first step as including (1) describing of the target segments, (2) positioning of new products within target segments, (3) determination of the competitive advantages and disadvantages, (4) fine-tuning the product design and pricing, and (5) market simulations (Butscher et al, 2000).
Market investigation becomes an important part of the first step. Either it conducted within or outside the company; market investigation must focus on the needs and desires of the consumers. What is the actually consumer need? What kinds of design consumer accept or dislike and what his concern. The consumer's appreciations as to design, quality, value, and price are also very important.
The marketing research is implied to identify the price consumers are able to pay for the particular product, given its quality, functionality and the other products provided by competing companies (Lockamy and Smith, 2000). Thus, obtained information from consumers of the product will lead designers to focus on their qualities, desires and features. Nevertheless, the final product should incorporate new features and prominent product specifics to assume product distinction and an admissible product life.
The target selling price is identified based on the market for the product as designed. Certainly, when a producer sells its products in different markets or through number of distributers, it is possible to sell the same product at different prices. For instance, pharmaceuticals produced in the U.S. have been exported at lower prices to distributers in Canada and Mexico than it is in U.S. At this point an average selling price has to be determined (Cooper et al, 1999).
The further step in the process is the identification of the estimated profit or target profit margin. Profits and profit margin have to be relevant and cover planned costs, additional required investment, and decommissioning or disposal costs over the product's life cycle. Similarly, the profit margin should be sufficient to support continuing product research and development (Lockamy and Smith, 2000). For instance some companies, such as Sony Corporation, build in more flexibility in establishing the estimated profit or target profit margin. There, they allow for tradeoffs between different products, i.e., within the product group some products will have some profit margins higher and some lower (Cooper et al, 1999). An estimated profit margin has to be based, and conform, the company's polices and standards.
The allowable product cost calculation is the third step in the current process. The allowable product cost is the difference between the target selling price and the target profit margin. The aim is to suit the cost constraints placed on the company, or as Cooper and Slagmulder describe it, establishing the target cost reduction objective.
The fourth step in the target costing process is defining the amount and nature of the product marketing and manufacturing costs and assuming itself that it may attain those target costs. Abovementioned costs cannot exceed the allowable product costs, unless extenuating circumstances, such as a targeted product release date, dictate proceeding with the product before sufficient costs reductions are obtained. Current stage of the target costing process finishes when the company finds out a way to meet the consumer's needs and requirements at the predicted target cost or when the particular product has been abandoned (Lockamy and Smith, 2000).
What have been the company's actual marketing and production costs? What effect will be gained from product revisions? Will new cost savings be required? In what areas can one reasonably expect cost savings? How fast should the product be released? Will the allowable cost require modifications in the supply chain? These are only some matters that may arise in proceeding through the process. Because periodically there are unexpected cost overruns due to design-related problems in the production process, a company may build in a "cushion" or "reserve for the production manager" of approximately 5-7 percent to cover such costs (Lockamy and Smith, 2000).
It is also possible to use other cost management practices, such as benchmarking, value engineering, and quality function deployment for defining what costs are predominant and looking for measures to make costs reduction (Cooper et al, 1999). Consequently cost reduction is often suitable, in target costing cost rationalization, not cost reduction, is the main achievement. This is consistent with practices such as value engineering, which is implemented to redesign the product, its production process, and its further distribution and service systems (Lockamy et al, 2000).
Cooper and Chew claim that a product's cost have to be to be subjected to the investigation of the marketplace from the initial stages of the development process (Cooper et al, 1996). In addition necessary to admit that such as tool known as benchmarking provides an opportunity for evaluating the usefulness and effectiveness of target costing practices.
Cost reductions have to be sought in producer's internal processes and external sourcing. Though a producer has significant ethical obligations in maintaining employee's health and safety, consumers of its products, and regulatory and legal requirements become majorly onerous annually, companies must minimize costs wherever it is possible. Sometimes, cost savings are just not possible, and the product characteristics must be revised again to isolate cost savings (Cooper et al, 1996).
The supply chain has to be utilized and considered for cost reduction opportunities. The supply chain is highly important for companies utilizing target costing. Ellram states that the purchasing function and supply management are critical at the beginning phases of the target costing process when evolving component-level target costs and when modifications and activities are occurring to achieve target costs. Moreover, supply management may play highly important role in managing, improving and monitoring costs in the supply chain (Ellram, 2002).
When acquiring component parts or necessary services, supply management may find it necessary to work more closely with suppliers. Additional cost savings may be achievable by creating trading partner relationships with the suppliers. The manufacturer's chief engineer or product manager might try to assist or provide incentives for a supplier to redesign a part or production process to achieve cost savings. Lastly, the supplier and the company can cooperate to make products development and improvement to reinforce the satisfaction and value provided to their consumers (Lockamy and Smith, 2000; Banham, 2000).
It is inevitable that relationship of trading partner can easily generate administrative cost savings through B-2-B (business-to-business) transactions or by making stimulations or some kind of rewards for conceiving more creative cost reduction procedures (Cooper et al, 1999; Lockamy and Smith, 2000). Maintaining the trading partner relationship, nevertheless, the company has to allow the supplier-trading partner to get a particular compensation making continuation as a trading partner worthwhile. It is important that trading partners company utilizing target costing, should be ensured of survivability and possible profitability (Lockamy and Smith, 2000).
Current part of the target costing process is iterative. Estimated costs are defined for the product as designed. It can be necessary to revise certain of the design features given the cost aspects. A definition will then have to be made to delete the product feature or to reconsider it, which would require another review of the production and supply chain processes and costs.
Finally, to be sure of effectiveness of the actual process, the monitoring of target costing process is highly required. Products periodically need to be redesigned and changed, and some additional products added to the product lines, and these procedures will also require product and cost planning respectively.
2.3 Defining Target Costing in Selected Industry
During the practical implementation of target costing system, organizations can potentially face various difficulties. Thus, for successful implementation of target costing methods in practice it is critical to know how the finished product will be transferred to consumer (especially during export). If the organization does not have its own distribution chain, the product price with its lower level then in open market will become an attractive object for different distributing companies, which would want to buy a product they need for the lower price and then immediately sell on the market aiming to get an additional profit margin. To achieve an effect from cost minimization and other expenditure reduction, it is important to manage final product cost, i.e. reduce distribution expenditures and trying to establish contacts with the final consumers. This point is very critical in operation of managerial accountants and their right decision making. The figure below shows the cost targeting in practice:
Quality requirements
Market
price
Market analysis
Sales forecast
Predicted level of profitability
Product cost determination
Analysis of Production and Suppliers
Market cost of the component
Market cost of function
Market cost of product
Admissible function cost
Admissible product cost
Juxtaposition and concordance
Requirements to producer and supplier
Final component cost
Final function cost
Final product cost
Product cost reduction
Figure 2.1: The process of target costing operation in practice
Source: The researcher
CHAPTER 3
3.1 Research Analysis
According to the this research, Target costing has been determined as consisting of a costing technique calculating the maximum allowable cost price by subtracting a necessary profit margin from the estimated selling price. Most of the manufactory companies in industry, such as textile, electronics and other assembling industries make an actual high adoption of these practices. This argues to expectations, as current industries are selected as the most appropriate industries for target costing practices implementation. This diversity of names used implies that big number of companies have generated the system based on same methods as target costing, without not properly understanding of its principles and concepts. In this regard, empirical research into such system types seems to be sensible focusing on the features of the particular system used, and not on its theoretical meaning. A relevant explanation for the insignificance of the number of competitors is that this measure may include little information about the in tens of the competitive environment, which is theoretically most critical. In time of product development process some goals should be considered simultaneously, for which reason target costing principles can be actually supportive. Many goals to be considered, such as high quality of the product, satisfaction of consumers by generating necessary products according to their needs, soon product introduction and low costs. (Lockamy and Smith, 2000). Referring to the relevant literature, expected cost reduction is the one of the most important aspects for successful target costing practices implementation, as its major reason is to deliver profitable products and services to the market by attaining relevant levels of cost. The point about target costing organization in this study was related also to the TCM process and behavior matters. It measured the several functional departments' involvement in the target costing application, and the organizational form implied for the target costing practices and techniques (shown in figure 3.1). TCM team membership becomes like involvement measure, though it is just informative about the presence of the particular department in the team, and not only about the involvement degree.
Functions
Subject
Responsibility
Finances
Coordination of products' prime cost planning process. Target profit calculations. Monitoring of achieved target costs. Reporting
Financial Director,
Chief Accountant,
Financial and Accounting Department Staff
Catering (Supplying)
Raw materials purchasing. Cost analysis of suppliers.
Head of Catering Department
Technology
Projecting. Cost construction. Specifications.
Senior Technologist
Production
Cost construction. Calculating for continuous perfection.
Executive Director responsible for production process,
Senior Engineer
Sales
Target cost determination. Functional composition of product with consumer's requirement consideration.
Head of Sales and Marketing Department
Figure 3.1: Team involvement in decision making process.
Source: The researcher
3.2 Conclusion
The current study proposed Uzbekistan companies involved in manufacturing activity imply target costing practices in their managerial process to reduce production cost and achieve target selling prices. As it has been mentioned in the previous sections, many companies within Uzbekistan and overseas adopt costing techniques similar to target costing. These costing techniques are implied and adopted across industries, where companies involved in assembling process are the main users. Study analysis and investigation results propose that costing techniques are majorly implied under market intense competition and present environmental uncertainty conditions, where referring to the relevant literature sources; the implementation of target costing is highly useful. Research findings propose that the important reason for adopting and implementation of target costing practices were the cost reduction. The Product Product Design and Product Development departments are primarily involved in target costing application, when the Accounting department's role seems to be critically important in calculations and cost allocation procedures. Team structures majorly organized as for target costing efforts of a particular company, where capabilities and experience of many organizational procedures have been collected to work on the target cost.
Wijewardena and De Zoysa (1999), for example, gives a brief overview of several particular characteristics of Japanese companies under which the management accounting systems operate, composed of team decision making, own company objectives, future strategies and the company-past experience and effective management accountants training. It reveals that in current analysis it would be not so easy to touch upon these matters. (Wijewardena and De Zoysa, 1999)
From current research we can sum up that majority of manufacturing companies get used of costing practices that are relative to the target costing techniques and as for last period target costing itself; the costing method determines a target cost by subtracting a required profit margin from an estimated selling price. Nevertheless, current research provides superficial insight into the concrete organizational processes and procedures that proceed, and are made by these target costs. Moreover, the role and importance of the target costing system in relation to the use of other management accounting systems wil1 be worthwhile investigating, as the latest survey study by Chenhall and Langfield-Smith (1998) and by Guilding et al. (2000) has described only modest appreciation for target costing systems by companies worldwide (Chenhall and Langfield-Smith 1998 and by Guilding et al., 2000).
Finally, in the environment of sharp competition, when production costs and final product price become dependent from each other and companies management trying to implement more innovative methods of cost allocation and budget control, increase their profits concurrently with developing and modifying their products and services, the adoption of target costing methods in a whole managerial process become an important and essential point in every effective decision managers and accountants make.
