ABSTRACT
In this chapter, the authors use a hypothetical company, the Acme Pencil Company Ltd., to illustrate target costing and value engineering in action. Acme produces a wide variety of writing instruments including traditional graphite pencils, ball-point pens, highlighters, and fountain pens. While a pencil is a very simple product, the application of target costing at the fictitious Acme Company illustrates the major issues that arise during the target costing process. The process begins by using market-driven costing to set the allowable cost of the new product. The product-level target costing process introduces the cost-reduction capabilities of the firm's designers and suppliers into the target costing process. The gap between the current cost and the allowable cost determines the overall cost-reduction objective. As the value engineering process continues, this objective is split into two parts, the target cost-reduction objective and the strategic cost-reduction challenge.
