Target Costing in Inter-Organisational Relationships and Networks
This chapter is about target costing in inter-organisational relationships and networks. Originating in Japan, target costing has been the object of increased attention in the West since the 1990s and has become a central accounting practice vital for product development (Kato 1993; Ansari and Bell 1997; Cooper and Slagmulder 1997; Ansari et al. 2007). It is claimed that 70 to 80 per cent of product costs are committed during development, and target costing aims to reduce costs already “on the drawing board” (Cooper and Chew 1996). By linking cost management to technology investments, target costing has been claimed to be “the next frontier within strategic cost management” (Ansari and Bell 1997). According to Ansari et al. (2007), target costing was an important factor behind the turnaround of Caterpillar in the mid-1990s. Other successful adaptations include Toyota, Olympus, and Komatsu (Cooper and Chew 1996; Cooper and Slagmulder 1997, 2004). The starting point and underlying logic is captured in the target costing equation (Ansari and Bell 1997):
The equation demonstrates how the target cost is the cost at which the company can afford to sell the product and still make enough profi t to satisfy its owners (Cooper and Slagmulder 1997; Everaert et al. 2006). The estimated selling price is determined by what customers are willing to pay. Important considerations are how well the product satisfi es customers’ needs and the price of comparable products available from competitors. The target profi t is determined by the return on capital requirements of the owners. By disciplining design engineers, the goal of target costing is to ensure that unprofi table products are never launched. Two combinatory factors have been put forward to explain the need to be certain that products are profi table from the day that they are launched: increasing development costs and shorter product life-cycles (Cooper
and Chew 1996; Ansari and Bell 1997). For example, if development costs were to be increased from $5 to $10 million at the same time as a product’s life cycle is reduced from four to two years, it would be very diffi cult to recover the development costs unless the products were to be profi table right from the launch of the product (Ansari and Bell 1997; Everaert et al. 2006).