ABSTRACT
Chained target costing systems are created when the output of a buyer's target costing system becomes input to a supplier's target costing system. The primary benefit of chained target costing systems lies in their ability to transmit the competitive pressure faced by the firm at the top of the chain to the other firms in the chain. A target costing chain can consist of all or part of a supply chain. Functionality-price-quality (FPQ) trade-offs play an important role in ensuring that all firms in the chain remain profitable. FPQ trade-offs can be used to get the buyer to increase component-level target costs by adding value to the components. When the target costing and supply chains for all of the buyers' and suppliers' products are drawn, then the entire supplier network will be identified. If during the design process the firm discovers that the product-level target cost cannot be achieved, then under the cardinal rule it must cancel the project.
