Target Costing

Problems of Target Costing

One should be aware of the problems of target costing. If so, the target costing can be properly
followed. Some of the target costing problems are presented below.

1. Development of Product Design

A product design team is constituted under the target costing. This team develops many designs
which meet the target cost and margin criteria. Thus developed design is acceptable by the
prospective customers, the project can be implemented. Moreover, the design should be
developed within a reasonable time frame.
If proper design is not developed, it is better to shelve the project for a short time. The reason is
that new cost reduction methods or less expensive materials will be available in the near future
that will make the target cost an achievable one.
2. Cost Reduction
Cost components of a product are properly analyzed for cost reduction. All the employees of the
organization should come forward for cost reduction programme. But, in practice, only a part of
employees are requested to work for cost reduction say for example Production Department
employees.
The management fails to call the employees of purchase department for cost reduction. The
qualified purchase staff can get the raw materials at reduced price from the suppliers through soft
negotiation skills. Hence, the production department employees are frustrated.
This type of problem can be avoided by the strong interpersonal skills on the part of the project
manager.
3. Low Degree of Team Spirit
The product design team can get a number of representations from the various departments. If so,
it is very difficult to reach a consensus on the proper design. Each department employees are
standing in their own views with regard to product design. It means that there is a low degree of
team spirit among the employees.
4. Lack of Team Leadership
Project manager should have strong interpersonal and negotiation skills. Moreover, he has
thorough knowledge regarding product design process. The absence of team leadership leads to
given up of the project.
Role of Cost Accountant under Target Costing
The Cost Accountant can clearly record the costing information from the stage of design creation
and up to the stage of selling the product. It means that a sketch is prepared for product design,
two or more processes are required for production, there may be quality testing, maintenance of
stock which involves some expenses and some selling expenses are incurred in sales.
In this process, cost estimates are prepared by the cost accountant. In earlier stage he/she can
provide estimates within a high-low range costs and gradually tightening this estimates to
express accurate costing information.
Whenever a design is prepared for a product, it requires heavy investment i.e. capital
expenditure. In this case, capital budgeting proposal is accepted by the finance manager by
putting various questions regarding issues or uncertainties in the capital budgeting proposal.
These questions should be answered by the cost accountant.
Generally, the Cost Accountant is requested to work with design team to understand the nature of
various costs involved and costs required for different design. Moreover, he is responsible to
reduce the gap between the current cost of product development and design and the goal of
achieving the target cost by the team.
Finally, the cost accountant, must continue to compare a product’s actual cost with the target cost
after the design is completed and till the company sells the product.
The cost accountant should know the complete details of a product such as features, importance,
components etc. He can assist the members of the design team and constantly evaluating the cost
of new design concepts. Lastly, he should have good analytical and presentation skills.
The reason is that the ongoing costing results must be continually presented before not only to
other members of the team but also to the other members of the company.