ABSTRACT
A hypothetical company, the Acme Pencil Co. Ltd., will be used to illustrate interorganizational cost management in action. Acme, a writing instrument manufacturer, wants to introduce a new pencil sharpener that differs from existing products because of its enhanced appearance. Acme's target costing process can be broken into three major sections. The first part is market-driven costing, in which the allowable cost of the product is established. The second section, product-level target costing, establishes the target cost of the product. The gap between the allowable cost and the target cost becomes the strategic cost-reduction challenge. In the final part, component-level target costing is used to set the target costs for each component in the product. The new product requires the application of aggressive cost management throughout the value chain. Consequently, for Acme the process of component-level target costing requires considerable application of interorganizational cost management before the contracts can be signed.
