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In today's rapidly changing business environment, product innovation is one of the keys to a company's survival and competitiveness. Manufacturers can no longer produce and market large volumes of standard products with a relatively stable market and technological climate. There has been a shift toward unstable, rapidly changing markets and technologies. To implement market-driven management across the organization, measurement and cost control systems must be designed to motivate the desired consumer-oriented behavior. The strategies that determine the direction of product innovation have become crucial to corporate management. Industrial marketers play a major role in product innovation, and cost accounting must support this role. Cost management methods must help with the production of new products which meet customer demands at the lowest cost, as well as with cost reduction of existing products by eliminating waste.
Management accountants have recognized that traditional methods (for example, standard costing) may not work well in the modern competitive environment and have responded. Traditional costing systems have been modified to promote automated factories, standardized parts and reduced lead times, all in an atmosphere of restructuring and globalization. Management accountants also need to modify cost methods to promote the successful introduction of new products. One of the ways they can do this is through target costing.
Target costing represents one of the most important areas where marketing and accounting overlap. Briefly, with target costing, marketing and design functions identify a product's desired features and its likely selling price. Under the target cost system, activities are controlled by using a target, or a market-based allowable cost, that has to be realized if the firm is to be profitable. A desired profit margin is subtracted from the estimated selling price to determine the target cost for the new product. All members of the organization subsequently work to design and manufacture the product at the target cost.
Target costing: a market-driven management method
Target costing was invented by Toyota in 1965 (Tanaka, 1993). In Japan, management accountants have worked hard to link their product-costing systems to their companies' strategies for product innovation. Japanese companies seem to use these accounting systems to motivate employees to act in accordance with their long-term strategies rather than as a tool for providing senior managers with precise and detailed data...