Current Status and Challenges of Target Costing
in Japanese Major Corporations
Masayasu Tanaka*,Masao Okuhara*, Masao Ariga**
*Faculty of Management of Administration and Information
Tokyo University of Science,Suwa
5000-1 Toyohira,Chino,Nagano 391-0292,Japan
**Sanno University
6-39-15, Todoroki,Setagaya-ku, Tokyo 158-8630,Japan
Masayasu Tanaka
Masao Okuhara
Masao Ariga
Biography
Masayasu Tanaka is a professor of Cost Management at the Management of Administration and
Information of Tokyo University of Science,Suwa. He is also a doctor of Cost Management. He
is an executive director of Japanese Association for Management Accounting (JAMA) and
advisor of Society of Japanese Value Engineering (SJVE).
Masao Okuhara is a assistant professor of Management of Administration and Information of
Tokyo University of Science,Suwa. His main field is Statistical Quality Control. Recently, he
has started to apply Design of Experiment and Multivariate analysis to the Value Engineering.
Masao Ariga is former General Manager of Cost Engineering Headquarters of CANON Inc. He
has developed the world's first personal copier "Mini Copier" in 1981. He has received
"Distinguished VE Service Award" from SJVE in 2001. Currently, he is Vice President of
Management System Association and lecturer of the SANNO Institute of Management.
1. Introduction
The term “target costing” was born in Japan in 1963, thus 40 years has passed already. During
this time the way of its thinking has grown and developed in Japan, and it has now become a
major method and recognized throughout the world. Enterprises introducing this method has
increased in the Westetn countries and are nearing the advanced enterptises in Japan.
The authors have coped with this study for more than 40 years, and the authors have held
study meetings for more than 500 times with business men and scholars . And they have carried
out the theoretical and technical development of target costing. Thus, the present paper, based
on the above, will mention the present state of target costing and the problems to be solved in
the major enterprises of our country and shows the guides for their solution.
2. The Main Activities of Target Costing
Many people have defined target costing. It is defined as follows here. There are two types of
target costing, narrow and broad. The former is the strategic target costing of new products
mainly carried out at controlling the development design and manufacturing preparation
activities. It is mainly the target cost management mainly for the new product development
design project team members to achieve the target cost. The latter is, in addition to narrow sense
target costing, the management to achieve target profit (rate) throughout the life cycle of the new
product, and managing such activities as product planning, development, design, manufacturing
preparation, manufacturing, physical distribution, sales, after sales, usage and disposal.
Achievement activities of the target cost and target profit
Broad sense
Target costing
The company-wide activities including product planning, development, design,
manufacturing preparation, manufacturing, physical distribution, sales, after sales,
usage and disposal
Here, the general target costing taken up by major Japanese enterprises will be taken up and the
outline of their major activities will be mentioned.
(1) The Planning Activities of the Target Cost and Target Profit (Rate)
These are the activities of setting the target cost and target profit (rate) at the planning stage of
the new products. That is, the activities of setting the cost and profit (rate) to be controlled by
additional consideration of strategy. The new product plan is approved by checking
technologically feasibility and the above-mentioned economical feasibility are checked by
carrying out a rough business review, that is, by carrying out an overall profitability analysis.
(2) The Confirmation of the Target Cost and the Target Profit (Rate) and the Activities of
Assigning Them Into Detailed Portions
Here, the realization of the new product plan and the methods of manufacturing and sales, etc.,
are carried out. The target cost and target profit (rate) are confirmed based on these. Next, the
assigning of the target cost and target profit (rate) into detailed portions are realized by the
coordination of the target cost promotion team and the leader of the development design team.
After these activities a through business review is carried out.
(3) Assisting and Promoting the Achieving Activities of Target Cost and Target Profit (Rate)
and Controlling Them
These are activities to assist and promote the achievement of the various objectives mentioned
above and to control the achievement of the various objectives by the target costing promotion
department staff. The former are activities by the target costing department staff giving the
development designers information about the functions and costs and to promote the
achievement of the various targets by coordinating with the development designers. The latter
are the activities by measuring and evaluating the degrees of achieving the above-mentioned
targets for major milestones such as development design, etc., and to carry out counter measures
as necessary. After these activities a through business review is carried out.
(4) Activities to Achieve the Target Cost and the Profit (Rate) by the Activities of
Manufacturing and Later
These are activities of going through development design to manufacturing preparation and
even if the target cost and target profit (rate) can be judged as achievable, they will not be
necessarily so. Therefore, activities to assist their achievement and promotion are carried out by
coordinating with the person in charge of the manufacturing department，etc., and the target
costing promotion staff.
(5) Evaluation Activities of Target Costing
These are activities to measure and evaluate whether the target cost and the target profit (rate)
are achieved by development design, etc., up till the manufacturing preparation activities, and
further by the various activities by manufacturing and later. This means to evaluate the result of
the project team activities.
3. The Problems of the Main Activities of Target Costing
In the target costing activities mentioned above, the present state of the major Japanese firms
and problems at present are as follows.
3.1 Problems in the Planning Activities for Target Costing and the Target Profit (Rate)
These activities are the most important among the target costing activities, but problems to be
solved are also numerous at present. Especially, three points will be pointed out here.
The first is that the product concept making methodology is very immature. L .Rogers says that
about 40% of the failures in new product development are failures in product concept making,
and points out the importance. However, development in promoting the methodology rationally
has not progressed so much at present.
There are, at present, such methods as the 0 phase VE, the quality function development
method、conjoint analysis, etc, but they are still very insufficient and management problems still
exist in the study of target costing. The authors have carried out this study and have published
several papers, but many things to be studied still remain(2) Classifying the types of new
products to be developed and designed, and to develop the methodology and technology for
such are being desired.
The second is the method to set the standard sales prices. 35% of the new products developed
are failures in setting the sales price. And Rogers mentioned before says that about 35% of the
new products developed are failures in setting the sales price. The standard sales price is the
general sales price shown to the dealers or the sales price shown in the product catalogue or the
desired retail price of the manufacturer, etc. The actual transaction prices are, in most cases,
determined by adding strategic elements to the standard sales price.
Actual sales price= standard sales price + strategic elements
Standard sales price= forecasted sales price + strategic elements
The major firms of our country mostly use the method of comparing the functions with
competing products in setting the standard sales prices when mass production is assumed.
However, when many competing products exist, new functions are often added to aim at
differentiating with the competing products. The method of setting these sales prices rationally
is immature in most cases, so it should be quickly developed. The authors have published some
papers on this problem(4), so it should be solved somewhat. However, some problems still
remain.
The third is that there are no theoretical equation between the amount sold and the sales price.
It should become a very effective tool if we can know about it. Thus the authors etc. developed a
theoretical equation capable of measuring the price elasticity of demand for the new product in
mind and developed it to be realistically usable(5). However, this method cannot be said to be
applicable in all cases.
3.2 Problems in the Confirmation of Target Costing and the Target Profit (Rate) and the
Activities to Classify Them into Their Details
Here, the following four points are to be stressed.
The first is on target costing. Concerning target costing in the major firms of our country, the
expense items of the target costs to be controlled are gradually growing toward the desired
direction(3). However, can we really say so?
In the first place, the target cost must be controllable by the development design project team
members. This is the most important matter. Therefore, the target cost should be mainly
composed of direct cost. The target cost should not be set to include costs that are uncontrollable
for them.
However, firms that apportion it as uncontrollable cost by some standard are not few. The
result of development designers cannot be evaluated correctly if this is so. This point should be
reconsidered.
In general, broadening the scope of the cost to be controlled in target costing is desirable. It is
necessary to improve the method of costing so as to be able to grasp the cost elements as direct
cost. It is useful to convert the indirect costs to direct costs by 4 elements costing, ABC (activity
based costing), FBC (function based costing), etc., these are problems to be coped with together
with cost accounting professionals.
The second is about the target profit (rate). This takes up many kinds of profit concepts
according to the control needs of individual enterprises. According to the results of investigating
the actual state of the main firms of our country carried out in 2002 by the authors, etc., (144
effective number of replies), the top profit (rate) concepts used most in target costing were as
shown in Table 1(6).
Table 1 Rank of target profit (rate) concepts most frequently used
Target profit
Target profit rate
(1)operating profit
(1)operating profit ratio
(2)recurring profit
(2)marginal profit ratio
(3)marginal profit
(3)recurring profit ratio
(4)gross margin
(4)contribution margin ratio
(5)value added
(5)gross margin ratio
Looking at Table 1, there are many profit concepts shown that are obtained by deducting the
direct costs from the sales price, but some are not. Among the former are the marginal profit,
gross margin, and value added. Among the latter are the operating profit and the recurring profit.
It is theoretically good to use the profit concept of the former. However, in reality, the sales
profit belonging to the latter is mostly used. The sales profit is calculated by deducting the cost
from the sales price and adding a certain rate of indirect cost to the direct cost. This will not
become a true evaluation result of the development designing team. The reason for using the
operating profit or the recurring profit is probably to know how much the profit from the new
product in mind contributes to the overall profit of the firm. This is a major problem to be
studied from now on.
The third is the classification of the target cost into its detailed portions. Looking at the method
of this classification of the target cost into its detailed portions and according to the result of the
actual state, the largest percent of the answers was “classify according to a rough construction
block and further according to a medium construction block.” Therefore, there are many cases of
classifications into components (30% of the firms answered for growing and mature products
and only a few (7%) firms classified them into detailed portions according to "functions"(3).
Development design is to think of alternatives by formal thinking, so it is not good under these
circumstances. It is necessary to proceed from the thinking of "apportioning according to
construction blocks" to the "apportioning according to functional areas". Their detailed portions
in the physical distribution equipment manufacturing industry.
The fourth concerns the detailed apportioning of the target profit (rate). When looking at the
present state of major Japanese firms, the target profit is set overall for the new products in mind
and seldom done by detailed apportioning. However, in order to be thoroughgoing in control, it
is necessary to apportion in detail. For example, when the new product is not sold alone but is
sold together with optional goods and priced services, detailed apportioning of the target profit
becomes necessary. Even when sold alone, when the market is considered globally according to
the U.S., Europe, and Asia, etc., and also apportioned in detail after segmenting the customers. It
is necessary to severely control the achievement of the target profit (rate).
3.3 Activities Assisting the Achievement and Promotion of the Target Cost and Target
Profit (Rate)
These activities are central in target costing, and the actual state in major Japanese firms is
fairly sufficient and the following four problems will be pointed out here.
The first problem in assisting and promoting the activities the achievement of the various
objectives is that there is insufficient useful information to achieve these targets. These
information include engineering information (such as new materials, new building methods, new
constructions, etc.), industrial engineering information (idea list, according to functions, cost
table, teardown, etc.), and others (dealers, design guides, success and failure examples, etc.)
The department in charge of promoting target costing should obtain sufficient information, and
they should be regularly maintained. There are only very few major Japanese firms sufficiently
carrying them out. Important problems remain in obtaining sufficient information and
maintaining them. It is necessary to organize them and supply them to development engineers.
The second problem is that there are still many firms with an insufficient cost estimation
system supplied by the target cost promotion department. It is good for the development
designers themselves to supply ordinary rough cost estimation. It then becomes necessary to
construct a system capable of maintaining a certain accuracy which they cause simply and
quickly. According to a survey result of major firms of our country (surveyed in 2000), the
number of development designers carrying out rough cost estimation reached 68% and is going
in the desired direction. However, the number is only 18% in the physical distribution
machinery manufacturing industry (seeTable2)(7).
Table 2 Persons in Charge of Estimation of Cost
Alternative
Overall
Electronic
equipment
Rough estimation
(1)
(2)
(3)
(4)
Effective No. Of answers
50%
35
13
3
304
68%
20
7
6
137
Type of industry
Transportation Machine･
equipment
Precision
18%
61
21
0
67
45%
39
16
1
83
Other
manufacturing
53%
29
18
0
17
Detailed estimation
(1)
22
36
3
14
24
(2)
43
34
51
54
29
(3)
32
25
45
30
47
(4)
3
4
1
1
0
Effective No. Of answers
304
137
67
83
17
(Remarks) The Alternatives are as follows
(1) Development designers
(2)
Person in charge of cost estimation
(3) Integration by cost estimation departments (purchasing, industrial engineering, manufacturing, etc.)
(4) Others
This might be the usual practice but is a point to be improved.
Even in the main Japanese enterprises there are still many places where useful cost tables are
not fully provided. The target costing department should make and provide cost tables to
estimate the “physical part costs” and “function level and/or specification costs”. The
development designers are not creating “physical parts” but are creating “physical parts” that are
achieving “functions”. Therefore, they need cost tables to estimate “the functional level costs”.
The target costing promotion department staffs should provide and carry out education to
utilize this system. There are still many enterprises that don’t do so sufficiently. However, as
shown in Table 3, cost estimations of the “functional level” are gradually increasing, and the
practical business needs seems to be high.
Of course, in the case of new products adopting new technology or improvements, they are
management staffs.
Table 3 Trend of rate Estimation of function level cost and Estimation of physical part cost
1983
Estimation of function
level cost
Estimation of physical
part cost
Effective No. Of answers
1987
1992
1996
2000
2004
29%
29%
25%
29%
41%
?%
71
71
75
71
59
?
199
284
265
295
301
The third problem is that the assistance to organize a project team for achieving the various
objectives is insufficient. These assistances are in most cases assistance from the VE project
team. The results of these assistances are large, but the understandings by the heads of related
departments are insufficient, and cooperation is insufficient. This must be improved at once.
The fourth problem is that the index necessary in controlling the achievement of the target
costs and the target profit (rate) within an allowable scope is not clear. Target costing adopts the
control organization of measuring and evaluating the degree of target costing and target profit
(rate). That is, target costing adopts feed-forward control (FFC).
However, it is very difficult to practice strictly. Therefore, it becomes necessary to practice in
an elastic manner. The method is as follows. Allowable scopes for the target cost and target
profit (rate) are set up for individual product groups, and to proceed to the next stage if they are
within the scopes. It is important to set up these scopes in an objective manner.
3.4 Problems Concerning the Achievement of the Target Costs and Target Profits (Rates)
at Activities Later Than Manufacturing
In general, the controls of activities during manufacturing and after are done by the
organization and not by the project team. Therefore, the achievements of various targets
(objectives) of the new product in mind are always grasped and it is very difficult to take proper
countermeasures. This is the actual state of major Japanese firms. This state cannot be left as it
is. Therefore, the person in charge of the target costing promotion department to regularly grasp
the state of achieving the actual costs and the amount of sales, etc., of the new products in mind,
and an organization becomes necessary to take countermeasures together with the person in
charge of the individual departments and achieve the various targets (objectives). This is a very
important problem and should be coped with as early as possible.
3.5 Problems in the Evaluation Activities of Target Costing
Here, there are problems in first the activities up to the finishing of the manufacturing
specifications, and secondly the problems in manufacturing and afterwards, and thirdly overall
problems.
In the first problem, it is necessary to set up a system so as to be able to grasp the achievement
of the target cost real time. There are many firms that have not done so. The state of the
achievement of the target cost according to the functional areas, and further according to the
major parts should be always be capable of being easily grasped (the regular grasping of the
state of variation of the costs). There are only a few firms in the major firms of our country
where this system is functioning sufficiently. This system should be fully built and the control of
utilizing this system should be undertaken.
Actually, many target costs are not achieved, and there are a little less than 60% cases where
the target costs are not achieved(6). The above system is indispensable to prevent the above.
Next, the analysis of the non-achievement of the target cost should be carried out. The results
are classified into those caused by the development designers and others, and are analyzed
independently by the development design stages, and these information should be utilized to
strengthen the development design. The authors stress that cause analysis is also necessary even
when the target cost achieved.
Even when the target cost is not achieved, we sometimes proceed to the next stage of
development design for management strategy reasons, but this percentage is reducing with time.
Even then, 30% of the firms proceed to the next stage of development design. This is an
important problem(8). (SeeTable4).
Table 4 Judgments When the Target Cost is not Achieved
1983
1987
introgrowth
ductory mature
41%
39%
59%
61%
1992
introgrowth
ductory mature
39%
40%
61%
60%
1996
introgrowth
ductory mature
39%
39%
61%
61%
2000
introgrowth
ductory mature
27%
21%
73%
79%
next phase
58%
not next
42%
phase
total
100%
100%
100%
100%
100%
100%
100%
100%
100%
(Remarks)
A new product was divided into the thing that was at the introductory period and the thing that was at the term of
growth and it showed.
In the investigation in 1983, this division was not done.
The second problem was to periodically measure the state of achieving the target cost or the
target for reducing cost. This is done by many enterprises. However, there are many cases when
there is a difference between the target and actual cost, so this point must be adjusted.
This adjustment is not always done so it must be done as quickly as possible. Then the actual
results should be measured monthly for individual manufacturing spots and an organization
should be set up to grasp whether the necessary countermeasure was taken or not. Then it will be
possible to prevent the recurrence of trouble based on the analysis of their cause.
Next, the trend (for example, the state of the actual sales price, the amount of sales, the sales
cost, etc., are analyzed monthly, and according to the area and customer, etc.) is analyzed as for
the amount of sales and profit of the new product in mind and compared with the product plan
and profit of the new product in mind. This is an activity done by related departments
cooperating with the target costing promotion department staff. This is also not done so much in
the major enterprises in Japan.
The third problem is the overall evaluation of the whole target costing activities. Here, the
evaluation target must be made clear, and next the object and period of the evaluation, and the
measurement and evaluation made for the results coinciding to them.
In general, there are two targets for evaluation. One is for the development design project
team members mainly to measure and evaluate the results of the development project. This is
measured and evaluated as the degree of achievement of the target cost. It is preferable then to
measure and evaluate the degree achieved according to the development designer or the small
group of development design. However, this is not yet done sufficiently at present at most major
enterprises in Japan. This is a future problem to be studied.
Next is to measure and evaluator the degree of contribution of the new product in mind, to the
overall plan (for example, the amount of sales and profit, etc.) of the company or the division
(division headquarters). The person evaluating often cannot be pinpointed. This is because the
manufacturing and sales departments are also related. Even then, it is necessary to build a
system to evaluate setting up the responsibility subdivision. The period of evaluation is to do it
periodically from the beginning to the end of sales, and to clarify the degree of achievement of
the target profit.
4. Conclusion
There are many high level cost plans in our country. However, there are also many problems
left. This paper picks them up according to the major activities of cost planning and also
mentions the direction for solving them. However, only a few can be solved easily. What is
necessary in solving them is to fully provide and perfect the infrastructure for target costing. The
problems concerning techniques can be taken up separately. However, matters concerning
organization and habits that have strong human factors must be solved related to the
strengthening of the infrastructure.
Target costing of our country are much dependant on the ability of the project team leader,
and is said to be weak in the portion functioning as an organization. The strengthening of this
point must be hurried.
Furthermore, how to cope with the globalization of target costing is also untouched. Then,
many problems remain and their solution looks like they are far ahead. However, as the leading
country of target costing, we must cope with them with a strong volition.
(Remarks)
1. L.Rogers: Pricing for Profit, pp.261-262, Basil Blackwell, 1990
2. If we show the major papers, they are as fillows:
(1)Masayasu Tanaka, Sougo Watanabe, Keigo Ito: How to Assist the Construction of
Product Concepts by Jitsuyou Kinou, VE Study Papers, No.24, pp. 77 – 86, Society of
Japanese Value Engineering, 1991, (In Japanese)
(2)Masayasu Tanaka, Keigo Ito: The Construction Assistance Method for Product
Concepts by the attractive function, VE Study Papers No. 24, pp. 127 - 136, Society of
Japanese Value Engineering, 1991 (In Japanese)
(3)Masayasu Tanaka, Tatsumi Koshiba: The Evaluation Method for Added Functions
in Product Concept Engineering, Shougaku Ronsan, Vol.41, No.5, pp. 55 – 71, Chuo
University, 2000
(4)M.Okuhara, M. Tanaka, H. Hirose: New Supporting Methods for New Product
Concept-making Based on the Customers’ Function Evaluations, SAVE International
Conference Proceedings, pp.1-15, 2004
3. Masayasu Tanaka: The Setting and Saibunka of Target Costs, Kigyou Kaikei, Vol.53,
No.11, 2001 (In Japanese)
4. If we show the major papers, they are as follows:
(1)H. Harada, M. Tanaka: Strategic Pricing of Added Functions by Incorporating the
Customers’ Uncertain Judgements, SAVE International Conference Proceedings,
pp.165-174, 1998
(2)H. Harada, M. Tanaka: A study on customer-oriented strategic pricing by
Utilizing Compound Effect of Functions, Kanri Kaikeigaku, Vol. 10, No.1, pp.11-26,
2001.
(3)M. Tanaka, F. Ling, Y. Iida: A new price estimation method based on the monetary
function evaluation of products by potential customers, SAVE International Conference
Proceedings, pp.1-15, 2003.
5. If we show the major papers, they are as follows:
(1)Masaaki Tanaka, Masayasu Tanaka, Kouji Kobayashi: The Method for Estimating the
Demand Function of New Products Based on Customer Evaluation, Kanri Kaikeigaku,
Vol.9, No.2, pp. 29 – 41, 2001 (In Japanese)
(2)M.Tanaka, M. Okuhara, H. Otsuki: A New Evaluation Method of Interaction Effects
Using Compound Added Functions Based on the Potential User’s Evaluation Value,
SAVE International Conference Proceedings, pp.1-15, 2004
(3)Masayasu Tanaka: The Setting and Saibunka of Target Costs，Kigyou Kaikei, Vol. 53,
No. 11, 2001 (In Japanese)
(4)M.Okuhara，M.Tanaka: A New Evaluation Method of Interaction Effects Using
Compound Added Functions and the Analysis on its Relationship to the Attributes of
Potential Customers，SAVE International Conference Proceedings, pp.1-17, 2005
6. Masayasu Tanaka: Target Costing of Leading Firms – The Setting of the Target Costs and
Their Saibunka，Kigyou Kaikei，Vol. 53, No.11, pp. 102- 111, 2001 (In Japanese)
7. Masayasu Tanaka, Harumi Ohki：On the Evaluation of Target Costing Activities(2),Value
Engineering .No. 221, pp. 31- 36, 2004 (In Japanese)
8. Masayasu Tanaka，Target Costing in Leading Firms - The Accuracy of Manufacturing
Cost Estimation. Kigyou Kaikei, Vol.54，No.１，pp.149-159