ABSTRACT
Target costing is a technique for proactive cost management during product design. It acts as an interorganizational cost management technique through the establishment of target costs for the components and other outsourced items. The interorganizational implications of target costing have four major aspects. First, the buyer has to set achievable component-level target costs. Second, the buyer has to choose the appropriate way to apply target costing to its suppliers. Third, the buyer can develop reward systems that create incentives for the supplier to increase its level of innovation and rate of cost reduction. Finally, when internal suppliers are involved, the application of component-level target costing has to be modified to accommodate the status of the supplier as a subsidiary. Once component-level target costs are established, they have to be applied. For externally manufactured components, setting component-level target costs determines the distribution of profits between the buyer and the supplier.
