Relevance of Target Costing to the Company’s Strategy

 The company is a large manufacturing firm; the external consultant noted

that the traditional accounting system was likely to be contributing to
poor performance. This suggests that there is a cost and profitability
problem present and thus the strategy the firm should pursue is cost
reduction. Therefore target costing will be very relevant to this company.
Activity-Based-Costing could be used to fully determine where the
inaccuracy of cost reporting is coming from, however Target Costing may
be a better solution in the short-term. The accounting system would allow
the company to set desired cost levels in order to increase profitability
and work at closing the ‘cost-gap’ that will undoubtedly be present upon
implementation. In the strategy of a manufacturing firm this is
particularly important, as production costs are generally a primary
determinant of profitability.