Tijdschrift voor Economie en Management
Vol. XLV, 3, 2000
The Impact of Target Costing on Cost,
Quality and Development Time of
New Products. Conflicting Evidence from
Lab Experiments: a Comment
I. RELEVANCE OF THE RESEARCH PROJECT AND CONTRIBUTION
The aim of this research paper is to study in a scientific way the
advantages - cited in the literature - of the concept of target costing.
The concept of target costing became known to the western business
and academic world during the eighties. Since then academics as wel1
as professionals have paid great interest to this Japanese concept. The
concept found its way to the West through a benchrnarling exercise
in which Japanese information systems and management methods
were compared with Western practices.
At the end of the seventies and in the eighties the Japanese
economy was considered to be more successful then the Westein
econoinies. This success attracted the attention of Western academies who wanted to study the causes and underlying factors which
lead to this Japanese "wonder". Among the many research paths
talten, one of them was to benchmarlc management information systems and management accounting methods of Japanese firms in
comparison with the systems and methods of f i m s in Europe and
North America. This exercise revealed the existence of several
uilique concepts and techniques like target costing, kaizen costing,
value engineering, functional analysis, interorganizational cost
control, JIT, quality circles, Kanban and others . . . Among those
*
UFSIA, University of Antwerp, Antwerpen.
elements the concept of target costing caught the eye of the academies and the profession, as this was a concept for ensuring a predetermined financial performance through mapping customer needs
and cost reduction.
At the end of the eighties the academic as wel1 as the professional
accounting literature contained many articles explaining these new
Japanese concepts and methods. In the beginning of the nineties articles where added to this body of literature, which contained field
research studies in relation to these concepts and methods. But like
P. Everaert, G. Boer and W. Bruggeman state in their article the benefits of this target costing approach were mainly supported by anecdotical evidence even in the academic literature. So one of the main
contributions of this research is that the 'so -called ' benefits of target costing are studied in a scientific way. With the use of lab experiment~the authors want to find statistica1 evidence that product
development undertaken under the target costing approach leads to
lower cost levels. Through the research questions put forward the
authors not only want to study whether or not target costing leads to
lower cost levels, but at the same time they claim they want to gain
insight in the process of new product development under three conflicting goals. This aim is reached by setting up the experiment
under different conditions (highílow time pressure, TC condition
versus NTC condition and design quality). These conflicting goals
are tested both for a radical new product development situation
namely next generation new products and for derivative new product
development.
By simulating situations with three conflicting goals this
research contributes to the goal setting literature as well. The contribution the paper definitively makes to that domain is not explicitly commented in this article. The contribution the paper makes to
the management accounting literature might be summarized as
follows: Target costing only leads to lower costs without affecting
the quality level, in a situation when derivative new products are
developed under low time pressure. From this experimental
research one might conclude that the benefits of target costing
only occur in very specific circumstances. The authors cal1 these
results "conflicting" and surprising. However if we analyze further the concept of target costing on the one hand and the research
design adopted on the other hand the results are maybe not that
surprising .
11. COMMENTS ON THE RESEARCH DESIGN AND METHODOLOGY
First of al1 we wil1 focus on the adopted research methodology. The
authors have chosen laboratory experiments in order to gather data
and test hypotheses. One of the advantages of laboratory experiments
is that one is able to controll for several variables. This was a necessary feature with regard to the hypotheses the researchers wanted to
investigate. Experiments have a high degree of internal validity,
extemal validity however is less and this characteristic is a necessary
condition for generalizability. "Most laboratory experiments make
little claim to extemal validity. In fact most authors place it under the
"fùrther research" heading. Intemal validity is most important, and
issues of sample selection, measurement reliability, construct validity, and generalizability normally are of less concern" (Mitchell
(1985)).
Also Birnberg et al (1990) state that "since management accounting is a complex phenomenon and it exists in complex environments
and organizations, the use of experiments typically raises issues
about extemal validity.". This comment certainly applies to this
research on target costing. Therefor we must keep in mind that the
results with regard to the benefits of target costing of this experiment
can not be generalized. In relation to experiments Shields (1997)
makes the following comments: "Many experiments have multiple
periods (trials), but they do not test hypotheses about the effects on
the dependent variables (e.g. performance) of timeltrials (e.g. learning, boredom, fatigue) individually or in interaction with other independent variables." Taking this comment of Shields further it would
have been interesting to study the leaming process of the persons
involved in the experiment. The students involved were allowed different trials and they probably leamed fì-om each of those trials
before they handed in their final trial. It is not clear from the paper
whether or not the researchers have this information on the different
trials available. If so this could probably be a source of data for a new
interesting paper.
The design of the experiment has been wel1 thought-out and is
consistent with the guidelines published in the literature on experiment~.In order to close the reinarks on the research methodology
I want to comment on the use of students in this particular
research design. Students are often used in laboratory experiments
and from the literature we know that they are acceptable substitutes for managers. However in those studies students had to perform tasks with which they were already fainiliar (e.g. the use of
budgets, ABC-information, different techniques for decision making). In this experiment a strong focus was put on the quality of
the carpet whereby quality was reduced solely to aesthetics. The
economics and bio-engineering students were probably not at al1
familiar with design and aesthetics. The unfamiliarity with a major
element of the task might have influenced the results. Again the
learning curve of the students would have been an interesting element to focus on, especially because learning took place under
several constraints.
The second part of the comments relate more to the concept of target costing and the way this concept is translated in order to fit the
experiment. In order to grasp the concept of target costing in an
experimental laboratory design the concept of target costing was simplified in many ways, one of them was to reduce target costing to a
pure cost ininimization issue. With the literature on target costing in
mind three elements come forward.
First of al1 target costing is treated in the experiment as a cost
reduction technique whereas in the literature the concept is much
broader. The key issues in target costing are: understanding market
needs and ensuring satisfactory financial performance at a given
market price in relation to a certain target cost which might not be
exceeded. Robin Cooper and Bruce Chew (1996) state that "target
costing drives a product development strategy that focuses the
design team on the ultimate customer and on the real opportunity in
the market. Target Costing ensures that development teams wil1
bring profitable products to the market not only with the right level
of quality and functionality but also with appropriate prices for the
targeted customer seginents. It is a discipline that harmonizes the
labor of disparate participants in the developinent effort, from
designers and manufacoring engineers to marltet researchers and
suppliers". This market dimension of the target costing concept,
which is usualy defined as one of the advantages, is not grasped
with this experiment.
Further in the Japanese business community target costing is a
process which is interrelated with fùnctional analysis, value engineering and interorganizational cost control. Perhaps the benefits of
target costing become realy outspoken when there is this combination
of target costing combined with elements such as functional analysis
and interorganizational cost control. The impact of functional analysis and interorganizational cost control on the target cost to be
reached does not play in the way the research is set up. So the concept of target costing in the experiment is much more narrow than the
concept of target costing which is applied in the Japanese business
environment.
Second target costing is always described as an exercise or
a process carried out by a multidisciplinary team. Personel from
R&D, production, sales, accountancy and finance work together
to obtain the specified target cost and to set a market price. In
this laboratory experiinent we analyze the performance of a
single individual, instead of focusing on the performance of a
team. In Japan a target costing exercise is always a group exercise.
These elements mentionned above lead to the question of construct
validity. Target costing in the experiment focuses solely on cost
reduction and this is achieved by one individual. In the literature and
in the Japanese business environment target costing has both a market aspect and a cost reduction aspect. Besides the target costing
process is carried out by a multidisciplinary team and target costing
is always linked to elements like functional analysis and interorganisational cost behaviour. Al1 these elements are not present in the
research design.
A third and last element of the comments relate to the environinent in which target costing is tested. According to the literature
target costing is especially useful in assembly-oriented industries.
"Target costing is used by many Japanese assembly-oriented
industries since the early 1970s. It is especially popular with hightech companies. While target costing has become standard procedure in assembly-oriented industries, modified target costing systems have also been developed for computer software companies
and for process-oriented industries as well. " (Sakurai (1989) p39)
Target Costing has made its mark in industries in which products
require a good deal of production assembly -cars, cameras, and
bulldozers, for example. (Cooper and Chew (1996)). The setting
of the experiment does not really relate to an assembly oriented
process. It relates to create attractive designs. One could wonder
whether the results would have been different under engineering
tasks.
111. CONCLUSION
The obtained research results reported in this paper are quite interesting. They surely contribute to the goal setting literature. With regard
to the target costing literature they provide thought-provoking findings which are worthwile to research further by other research
designs, which have a high degree of external validity. In this way
the results could be contradicted or confïrmed and then be generalized. Further if the authors have collected data on the different trials
of the persons involved in the experiment, these data would allow the
authors to gain insight in the process of cost minimization under different contstraints and to study the learning curve under the different
conditions. In this article only the outcome of the different cells is
compared. By comparing outcomes no insight is obtained in the
process itself.
To conclude my remarlts I want to express my appreciation for this
research project. The project is embedded in the academic literature.
The research hypotheses are formulated on the basis of existing gaps
in the relevant literature. Aftenvards the laboratory experiment is
carefully designed and the statistica1 results are presented in a clear
and honest way. A nice job, which still leaves possibilities for further
research, has been completed by the authors.
REFERENCES
Bimberg, J., M. Shields and M. Young, 1990, The Case for Multiple Research Methods in
Empirica1 Management Accounting Research (with an Illustration from Budget
Setting), Journal ofManagement Accozlnting Research 2, 33 -66.
C0oper.R. and W, Chew, 1996, Control Toinorrow's Costs Through Today's Designs,
Haward Business Review, jan - febr., 88 - 97.
Mitchell, T., 1985, An Evaluation of the Validity of Correlational Research Conducted in
Organizations, Academy of Management Review 10, 2, 192 205.
Sakurai, M., 1989, Target Costing and How to Use It, Jozlrnal of Cost Matzagement 3, 2,
surnmer, 39 - 50
Shields, M., 1997, Research in Management Accounting by North Americans in the
1990s, Journal of Management Accounting Research 9, 3 61.
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