TARGET COSTING

Target Costing and Pricing Decisions

Target Costing and Pricing Decisions

Introduction

Management Accounting is a process of accounting which identifies the cost of production by evaluating the cost of input in each step of production. The system captures the variable costs as well as, the fixed costs. The cost accounting procedure includes, first identifying and recording different costs and then comparing the input cost against the actual output. This information provides management with required information to make decisions.

Cost accounting provides basis for setting the price of company's products, as well as, providing required information for develop budgeting. It also provides basis for implementing cost control programs, which assist in improving the net margins.

A profit is earned by the company when it charges customers some amount above the cost it incurred for manufacturing the good and/or services. Cost-plus pricing and Target Costing are two of the most recognized ways of managing the function of cost and price. However, both approaches are opposite of each other. This essay will critically examine the concept of target costing and its significance in today's competitive environment. The essay will also highlight differences between cost-plus pricing and Target Costing (Weygandt & Kieso 2009, pp.30).

The Implications of Target Costing for Pricing Decisions

Reflecting on how do companies achieve success again and again, and convinced from the idea of Porter that great business leaders enjoyed a very limited set of competitive strategies, forced companies to develop innovative systems. Indeed, "sell cheaper than others," "make the product different from others," "concentrate on the quality", these are the basic recipes for success. However, even the best strategy does not a guarantee success. In order to take advantage of wise advice, for example, selling products cheaper than competitors, one must first make the product cheaper, and this is art, it is naive to believe that competitors will not try to do the same thing as you.

Moreover, determining the right time of reducing price is another issue. In most cases, companies are beginning to really fight for the reduction of costs only when the product is developed and transferred to production. It is then often comes an understanding that the product cost was too high for it to be profitable.

An affirmative answer to these questions gave an idea to Japanese experts working in the production management and management accounting, which goes as far back as the 1960s. These experts offered a simple and effective solution, developing the concept of target cost management and the system is being used successfully today, after forty years of development (Ansari et.al 1997, pp.32).

Considering the causes of target costing, one should pay attention to the changed face of business in recent decades. Today, one of the main factors of success and competitiveness of companies are innovative products. Manufacturers in many industries can no longer sell a huge quantity of standard products, relying on the relatively stable markets and technologies. Modern markets are volatile, and technologies are progressing very quickly, which forces managers to use new approaches to management, ...