TARGET COSTING

Target Costing and its Implications



Target Costing and its Implications

Introduction

The purpose of this report is to enlighten the concept known as target costing. This report aims to explore the system of target costing, the process and procedures through which target costing can be effectively implemented, the selection of the manufacturing operation in which the system can be incorporated, to explore the advantages and disadvantages of the system and then recommends the process that is to be followed pertaining to the selected manufacturing operation. The companies that have incorporated the target costing in their operations show some common features in their methodology and how it supports the process of target costing. Nowadays organizations amend their organizational structures, customer orientation, product development and their entire supply chain activities in order to facilitate the target costing system.

The Research

Step 1: Target Costing System

The target costing system is the procedure through which companies and multinational can gain competence over their pricing methodologies. This system can be defined as a procedure for managing the costs effectively so that the overall cost of the product or the service can be minimized; the applications of this system are not limited to only single phase of the product or service life cycle (Brimson, Antos, 1999, 99-102). Nevertheless, the production mechanism, product/service engineering and the R&D are the areas that can assist the overall process of target costing (Brimson, Antos, 1999, 99-102).

The target costing system involves a sophisticated and effective process; the steps involved in this process are enlightened below:

Identification of customer wants and the sensitivity of price in the market

Setting up the planned selling price (Swamidass, 2002, 42-47).

The target costing strategy chosen by the company must be based on target costing formula (selling price-desired profit)

The roles should be clearly defined and communicated to the teams and vendors

Construction of product design

Verification of the manufacturing process

Selection of the raw material

Adjustment of the trade-offs in order to meet the target costs

Implementation of the process

Step 2: Selection of Operation

The identified practices indicate that target costing is supported by a matrix structure in the vertical order along with the functional activities of an organization combined with horizontal process of cross-functional teams (Swamidass, 2002, 42-47). This section of the report will focus on the enlightenment of a manufacturing operation and discuss the implementation of the target costing system. For this purpose the organization known as Volkswagen Group was chosen for the analysis (Hibbets, Albright, Funk, 2003, 61-65). Wolfgang Dürheimer the CEO of Volkswagen is well known for his effective management in operations that has enabled him to successfully cut the costs and achieve maximized profits. This section will discuss the incorporation of target costing method in the manufacturing operations of Volkswagen in order to enlighten the procedure and its significance.

The operations of Volkswagen have five teams; each team is divided into a particular area of production according to their expertise. The manufacturing operations of this corporation include large cars, small cars, mini-vans, trucks and jeeps. In the manufacturing operations of this organization each team is ...