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EXECUTIVE SUMMARY
The target costing method works "backward" from traditional cost-plus methods and begins with a targeted sales price for a product. This price is set based on what the customer is willing to pay. It considers not only the preferred current selling price but also the later life cycle pattern of prices. This technique has key managerial implications. This article considers these implications along with implementation guidelines. Examples of industries successfully using target costing are included. Ongoing controversies concerning where the techniques can best be used are discussed. Further considered are international differences in target costing as well as challenges of global outsourcing along the supply chain. The article ends with implementation challenges, significance for practice, and suggestions for future research.
INTRODUCTION
Mergers, acquisitions, and consolidations continue to change the scope and size of many firms. While larger companies benefit from economics of scale and larger research and development departments, leading to lower production prices, the consolidation and increased merger activity brings disadvantages as well. The key disadvantage is competition from both domestic and global players with differing production and delivery costs. The dilemma for manufacturers is to match the lower prices of the global competition and still offer the highest quality products customers demand. Target costing may serve as a solution when developing new products, minimizing costs through the optimal use of all resources along the entire supply chain (Ahmed, Berry, Cullen, and Dunlop, 1997; Zsidisin and Ellram, 2001; Lockamy and Smith, 2000; Welfle and Keltyka, 2000; and Shank and Fisher, 1999). Lockamy and Smith (2000) agree target costing focuses less on cost and considers customer requirements to be the primary cost driver. Cost is seen as a result of the process whether focusing on a price-based approach, a value-based approach or an activity based cost management approach throughout the global supply chain.
Target costing reduces costs by involving suppliers and manufacturers as contributors to the design process, thereby focusing the entire chain toward the overarching goal of eliminating costly waste, excess, and unevenness. The supply chain partners can also consider costs of reclamation and disposal of products after their useful life in a total, closed-loop life cycle costing model.
TARGET COSTING
Most American and European firms have long used the traditional...