THE COST STRATEGIC MANAGEMENT THROUGH TARGET
COSTING, A MODERN INSTRUMENT OF MANAGEMENT
CONTROL
Dragomirescu Simona Elena
University of Bacau, Faculty of Economic Sciences,
Bacău, Roumania
e-mail symonna21@yahoo.com
Solomon Daniela Cristina
University of Bacau, Faculty of Economic Sciences
Bacău, Roumania
e-mail solomon_daniela@yahoo.com
Abstract
Traditional methods for costs calculation start form costs to which, in order to obtain the market sell
price, the desired profit average is added. Under present conditions, when the market prices are
already fixed, as a consequence of the demand – offer report, the use of an opposite calculation is
imposed: starting form the sell prices, we determine the costs that must be reached by the respective
products. These costs, cannot be surpassed under the conditions when the enterprises whishes to
obtain the planned profit.
The Target costing method, a method of costs calculation oriented towards the market, answers best to
this requires. It is described by Dan Swenson, Shahid Ansari, Jan Bell and Il-Woon Kim in „Best
practices in Target Costing” paper as process of costs and profit simultaneous planning. Specialists
succeeded in surprising the essence of the method in six characteristics [7], namely:
(a) Target costing is a cost calculation leaded by market, with the meaning that in order to determine
the target costing, firstly the market’s price is established (competitive), from where the
desired margin (profit) is extracted. The price is regarded a limit that cannot be surpassed due
to competition. Therefore, the products are considered unviable, if from the conception phase
up to final costs there are not framed under this limit.
(b) Orientation towards clients. The clients’ requires concerning quality, costs and time are
simultaneously embodied in product and process decisions, these guiding the costs analysis.
Value (for clients) of every characteristic of function embodied in product has to be bigger
than its cost. It results, therefore, that the method is clients oriented one, the target costing
should allow not only the attaining the desired profit, but also the maintenance of product’s
competitively dimensions.
(c) Orientation towards product. The target costing operates even from the product’s conception
phase. According to this method, approximately 80% from a product costs are engaged even
from its conception, the margins realised on products during its life duration being mainly
connected to the costs control even from the project phase. The changes should have been
made before the fabrication’s start, the purpose being lower costs and a more reduced
launching time on the market.
(d) Multifunctional teams, formed of designing engineers, production engineers, representatives from
sell, supply, marketing, accountancy departments, answer in unanimity for the entire process
(product and the established target costing), from the conception up to production phase.
(e) The involvement of value creation chain. In the multifunctional team other members from outside
the country can be also attracted, such as, for instance, suppliers, clients, distributors etc.,
because the target costing system is based on a favourable collaboration on long term with all
members of the value creation chain. They are all involved in the target costing process and
follow the reducing of costs.
(f) Orientation on the product’s life cycle duration. The costs calculation and analysis is realised on
the whole product’s life duration, all the costs associated to its control being taken into
consideration, namely: the purchase price, exploitation expenses, expenses with maintenance
and reparations and the expenses with dispatching and administration. Costs reduction is
followed both for enterprise and client (possession account).
Keywords: target cost, target price, management control, markets and competition
JEL Classification: M41: Accounting
1. CONCEPT, PRINCIPLES AND CALCULATION RELATIONS
Target costing represents a cost of management concept, developed and used even from the
70’s by Japanese enterprises (especially in the motor vehicles industry). This appeared from
the need of producing smaller series, in order to answer better to the market’s requires and
because of the introduction of new methods of production organization and technologies
based on automation.
The target costing concept was defined on various means by specific literature. According to
M. Sakurai, in his paper called „Target costing and how to use it” the target costing
represent “a cost management tool for reducing the overall cost of a product over its product
life cycle”. [5] R. Cooper says that the purpose of target costing “is to identify the
production cost for a proposed product, in such manner that product, when sold, generates
the desired profit average”. [3] T. Tanaka explains the target costing as “the effort made at
the planning and development stages to obtain a cost target set by management and that it is
used to bring the target cost and the estimated cost into line by better specification and
design of the product”. [9]
According to the official terminology of the Chartered Institute of Management
Accountants, “target cost is a product cost estimate derived by subtracting a desired profit
margin from a competitive market price. This may be less than the planned initial product
cost, but will be expected to be achieved by the time the product reaches the mature
production stage”. [2]
Comparing the definitions it can be noticed a difference between the Japanese and
Americans. In this sense, Tanaka T. wrote in one of his paper that “a manager from Europe
or USA uses the cost information to adopt decisions regarding prices and investments, while
a Japanese manager uses the price information to control costs”. [9]
The Target-costing method is defined as a “means of administration of costs, applied for
reduction of inputs for products’ fabrication during the entire life cycle, through a
consolidation of efforts of production, elaboration, research, marketing and accountancy
sections of the enterprise”. The principles on which the target-costing method is based on
are:
 the calculation and costs analysis is made on product. Every fabricated product is
the natural connection between the market and enterprise, constituting, for this, its
source of profit;
 the calculation and costs analysis is made on product’s life cycle. The target costing
operates even from the conception phase of the product and it may be revised during
the different phases of product’s life cycle. According to this method, approximately
80 % from a product’s costs are signed on even from its conception, the average
realized on product during its life duration, being mainly connected to controlling the
costs even from the study or project phase. After this phase, it becomes much
difficult to exert any influence on the costs. The cost control is realized through the
respecting of the established objectives (costs); also, time is an important factor.
a product’s viability is measured in rapport to the market. Two aspects are followed:
the clients’ satisfaction and the price that should be a competitive one. In what the
second factor is regarded, the price is seen as a limit that cannot be surpassed due to
concurrence. Therefore, the products are considered unviable, if from the conception
phase up to the final costs do not frame under this limit. Thus, the controlling a
product’s cost is realized during the entire production cycle. [4]

On the basis of the aspects mentioned before results that the target cost may be defined as
“an estimated production cost, calculated according to a predicted competition sell
price”. 1]
At the most basic level, the desired target cost is the cost of resources that should be
consumed to create a product that can be sold at a target price. The target costing process
begins with the target price which is determined through interaction with consumers.
However, management must determine an acceptable profit margin for the product to
compute the desired target cost. [8] The basic target cost formula is as follows:
Target Cost = Target Price - Profit Margin
The factors taken in consideration for establishing the target costs are, for instance, the
appointed market, the competition degree, the type of the fabricated product etc.. Moreover,
all the participants to the production process focus their efforts for products’ projection and
fabrication in such way that the effective productive consumptions would frame in the
awaited (established) limits. The only element that the enterprise cannot control is the sell
price. This is formed according to: needs and incomes of the potential clients; product’s
particularities; the production capacity on long term; the prices practiced by concurrence.
The target cost is situated, usually, between the acceptable cost and estimated cost.
 the acceptable cost corresponds to the optic market and of a functional logic of
products realization and is determined according to the concurrence;
 the estimated cost corresponds to a organic construction logic of product and is
determined according to present production means and used technologies.
The formulas used in target costing are:
 the evaluation of acceptable price:

the evaluation of target price:

the evaluation of estimative price:
- the case of existent products
-
the case of projecting of new
products
Competitive selling price – the expected
average
Acceptable cost
optimization cost
+
Reduction
and
Complete unitary cost determined on the
basis of data from accountancy
Complete unitary cost determined on the
basis of data from projection
The estimative cost is a cost build during the whole product’s life cycle that looked through
the point of view of producer and user, has the following calculation relation:
The estimative cost
At producer
Production cost
+ Research-development cost
+ Distribution cost
+ General administration cost
= Estimated complete cost
At user
Acquisition/purchase cost
+ Other costs connected to acquisition
+ Use (exploitation) cost
+ Maintenance and sustenance cost
+ Residual cost
= User’s possession cost
Fig. 1. The global cost on product’s life cycle
2. A CASE STUDY OF TARGET-COSTING METHOD FOR
INDUSTRIAL ENTERPRISE „SIRCA” S.A. PIATRA-NEAMŢ
For S.C. „SIRCA” S.A. Piatra-Neamţ enterprise, that has as activity object the
production of components for agricultural vehicles, the following data are established for a
period of five years, data referring to the number of sold units and predicted sell price, for
one of the predicted prices – semi-industrial bearings, for which the average life period is
five years:
Table 1. The production and turnover volume estimation for the “semi-industrial bearings”
product for 2009-2013 period
Explanation
Predicted quantities
Sell price
Turnover
(pieces/year)
(thousands lei/piece)
(thousands lei)
2009
4.820,00
900,00
4.338.000,00
2010
5.120,00
828,00
4.239.360,00
2011
5.200,00
792,00
4.118.400,00
2012
4.800,00
791,50
3.799.200,00
2013
4.800,00
790,00
3.792.000,00
Total
24.740,00
20.286.960,00
Phase 1. The determining of the average sell price on the product’s life
20.286.960,00 thousands lei
The average sell price
= 820,01
=
thousands lei/piece
during the product’s life
24.740,00 pieces
Phase 2. The determining of the average profit margin
The profit rate is differently established every year, accordingly to products life duration.
According to this rate the corresponding average profit margin is established.
Explanations
2009
2010
2011
2012
2013
Total
Table 2. The average profit margin calculation
Turnover
The profit rate to
The average profit margin
(thousands lei)
turnover
(thousands lei)
4.338.000,00
8%
347.040,00
4.239.360,00
10%
423.936,00
4.118.400,00
9%
370.656,00
3.799.200,00
8%
303.936,00
3.792.000,00
7%
265.440,00
20.286.960,00
1.711.008,00
-
The average profit margin
during the product’s life
duration
=
1.711.008,00 thousands lei
The average profit during
the product’s life
duration
=
The percentage of target
cost in price
=
24.740,00 piece
= 69,16 thousands lei
/piece
1.711.008,00 thousands lei
20.286.960,00 thousands lei
x 100 = 8,43%
100% - 8,43% = 91,57%
Phase 3. The target cost calculation
Target
= Target selling price
cost
(820,01 thousands
lei/piece)
-
Target profit average
(69,16 thousands
lei/piece)
= 750,85
thousands
lei/piece
Phase 4. The target cost decomposition on costs components
For S.C. „SIRCA” S.A. Piatra-Neamţ industrial enterprise, the cost calculation is made
according to method order – an absorbent one that takes under consideration for production
costs both direct and indirect expenses distributed correspondently for every product.
Table nr. 3 The target cost decomposing on costs components
The target cost components
The average in
Target cost on costs
product’s cost
components
(%)
(thousands lei/piece)
Direct expenses
40%
300,34
Indirect production expenses distributed
60%
450,51
Total
100%
750,85
Phase 5. The determining of the effective product’s cost with distribution on the direct
and indirect production part and comparison with the target cost for
deviation determination
Table 4. The calculation of the effective estimated cost of “semi-industrial bearings” product and
comparison with the target cost for deviations determining
Cost components
Effective Target cost on cost
Deviations
cost
components
Direct expenses
320,38
300,34
+ 20,04
(thousands lei/piece)
Indirect production expenses
distributed
465,55
450,51
+ 15,04
(thousands lei/piece)
Total
785,93
750,85
+ 35,08
(thousands lei/piece)
The
formulation
of
objectives for the effective
cost reduction until the level
of the target cost
The data from the table no. 4 may be presented as follows:
ESTIMATED COST
(785,93 thousands lei/piece)
Direct expenses
+ Indirect production expenses distributed
TARGET
COSTING
Costs reduction objective = 35,08
thousands lei/piece
ACCEPTABLE COST
(750,85 thousands lei/piece)
Target price
- Target profit
Fig. 2. The target costing between the acceptable cost and the estimated one
In the above presented example, the estimated cost is superior to the targeting cost, as
consequence, its reduction objectives would have to be formulated. But the reductions
should be the result of “changes of the product’s characteristics that would not alter the
value perceived by the client” or “amelioration of supply, production, distribution existing
methods”. The optimization processes suppose the performing of several successive value
analysis before the estimated cost fixation to an acceptable level. The cost reduction
supposes a series of phases:
 the optimization in conception phase that supposes the reduction of cost departure: the
estimated cost for a new product may be assimilated to a standard cost much lower than
the actual cost practiced by economic agent (estimated cost = planned cost);
 the optimization in proper production phase, that supposes the real cost control to
maintain almost all targeting cost; the phase is named in specific literature “cost
maintaining”. [6]
Costs reduction and adjusting may be presented by the schema known also as Maiko
pattern.
Target cost
Conception/Cost reduction
Cost and
technology
amelioration
Estimate cost
(standard)
Cost maintaining
The departure
causes
elimination
Real cost
Fig. 3. Maiko Pattern
Source: Scorţe C., Farcaş M. - „Target-costing, a new possibility of cost calculation” [6]
3. CONTROL THROUGH TARGET COST
The “Target costing” concept seems to be quite simple on a first view: an enterprise will
produce only the products for which it can assure an effective cost at the level of the
predicted one (target). The question that appears would be: “what would happen in the case
of the products for which there is demand and which is already produced, but for which the
effective costs cannot be reduced?” The answer to this question was given also by the
Japanese economists through Kaizen method. The difference between Target costing and
Kaizen costing is in the fact that the former is mainly applied in the projecting and
fabrication products, while the latter in the producing phase.
Target costing, looked at as a intercession management is based on the rule according which
the market dictates the sell price and not the enterprise cost.
Target cost may be obtained by making the sum of partial costs that, on their turn,
constitutes costs engaged by different functions of the enterprise for fabrication and sell of a
product. Another approach supposes the determining of target costing as a sum of
production costs of different components of the project. The ABC method or other methods
such as value analysis may contribute to the simplification and acceleration of these
calculations. The value analysis process supposes the following phases:
 phase 1: the identification of a good’s functions – starting from the market’s
requires, the product’s functions are ordered and divided in major and secondary
functions, of amelioration, suppress or create, aesthetic and useless functions;
 phase 2: the critical analysis of the manner in which the different components fulfill
the respective functions;
 phase 3: the searching for replacement solutions – the optimum process is the one
fulfilling the functions on minimum cost. [3]
The target costing method is a part from a global intercession that regards the reduction of
costs during a continuous amelioration process of technologies and fabrication processes
aspect that supposes a new style of human resources management and increased
competences. The continuous costs reductions should regard the whole enterprise.
Concretely, are followed:
 the controlling of different phases of product’s life;
 costs analysis starting in the products’ conception phase according to their
characteristics and possible selling price;
 the assuring, permanently, that the new products will be advantageous on the life
cycle duration, the predicted costs comparing with the realized one and,
respective, their reporting to selling price;
 the reducing of products’ conception terms;
 the diminishing of development costs and assuring of a quick amortization;
 a better organization of relations with the suppliers and collaborators;
 mobilization and motivation of all the competences from the enterprise’s inside
through a transversal approach in favor of a bigger competition. [1]
From this perspective, in order to integrate it in the management of an enterprise four
dimensions are regarded:
 markets and competition (taking into consideration the economic environment);
 the integration of competences in different functions of the enterprise;


the products’ conception (the predictions of the effects of the decisions presented
on the future results);
the creation of tighter connections between planning and current activity
control.
References
[1] Caraiani C., Dumitrana M. (coord.) ş.a.- „Contabilitate de gestiune şi control de
gestiune”, Editura InfoMega, Bucureşti, 2005, pp. 385-387.
[2] CIMA Official Terminology, CIMA publishing, 2005.
[3] Diaconu P., Albu N., Mihai S. Albu C., Guinea F. - „Contabilitate managerială
aprofundată”, Editura Economică, Bucureşti, 2003, pp. 133-138.
[4] Ristea M., Possler L., Ebbeken K. - „Calculaţia şi managementul costurilor”, Editura
Teora, Bucureşti, 2000, p. 323.
[5] Sakurai M. – “Target costing and how to use it”, Journal of Cost Management, Summer,
1989, p. 39-50 on http://maaw.info/ArticleSummaries/ ArtSumSakurai89.htm accessed
on 5 July 2009.
[6] Scorţe C., Farcaş M. - „Target-costingul, o nouă posibilitate de calculaţie a costurilor”,
Revista
Facultăţii de Ştiinţe Economice, Universitatea din Oradea, seria Ştiinţe
Economice, volumul II, 2006, pp. 593-597.
[7] Tanaka T. – „Target Costing at Toyota”, Journal of Cost Management, Spring 1993, p.
4-11 on http://maaw.info/ArticleSummaries/ ArtSumTanaka93.htm accessed on 5 July
2009.
[8] Williams R.J., Haka S.F., Bettner M.S. - “Financial & Managerial Accounting. The
Basis for Business Decisions”, McGraw-Hill Irwin, New York, 2005, p. 810.
[9] http://www.cnaa.acad.md/files/theses/2006/4748/svetlana_platon_thesis.pdf accessed on
24 April 2009.
[10] http://www.documentareonline.com/files/cursuri/Contabilitate%20si%20control%20de
%20gestiune/cap9.pdf accessed on 25 April 2009.