CHAPTER 2

Product Life Cycle Accounting

and Target Costing

It is too often neglected that management accounting is at the service of

the company and its business operations. Pursuant to this, what lies at the
core of these business operations is too often overlooked: the product or
service. In order to fully understand how management accounting can pro-
duce pertinent and useful information for decision-making, it is crucial to
understand what lies behind the product. This rough understanding can lie
in the first place in its life cycle. It is important to be clear with the product’s
journey from birth (launch) unto death (decline and withdrawal from the
market). This understanding is especially crucial nowadays, as most of the
technologies learnt in managerial and cost accounting courses are undoubt-
edly applicable to manufacturing companies commercialising a single prod-
uct addressed to a mature and domestic market (Anthony, 1988; Anthony,
Dearden, & Bedford, 1984). Such companies were characterising twentieth
century’s industrialisation where mass consumption and production were
predominant. Everything was to be built, households were to be equipped
with everything—whiteware, hi-fi, vehicles, etc. (Berland & Chiapello,
2009; Chiapello, 2007). With toughening competition, constant techno-
logical advances, customers’ infidelity to a company or a brand, these tra-
ditional management accounting models are not always and systematically
applicable.
Under the purview of clarifying what confronts the product and
how this may affect business operations and controls, the first section
discusses product life cycle, explicating each of its four stages. The sec-
ond section discusses what counts from an operations and management

© The Author(s) 2018 55

V. Joannidès de Lautour, Strategic Management Accounting,
Volume I, https://doi.org/10.1007/978-3-319-92949-1_2
56  V. JOANNIDÈS DE LAUTOUR

accounting viewpoint at each stage in product life cycle. This discus-

sion around product life cycle and associated accounting concerns leads
to placing a special emphasis on target costing, which directly proceeds
from pressures exerted on the product selling price by market forces over
time. This section on target costing engages in the implications target
costing has on a product cost structure, the associated value chain and its
management, as well as the controls ultimately required.

1   Product Life Cycle and Strategy

This section develops the strategic concerns associated with product life
cycle: from conception unto death, detailing each stage separately. Product
life cycle can be seen through four stages. As per the diagram below, the
four stages do not have the same length (Auzair & Langfield-Smith, 2005;
Granlund & Taipaleenmki, 2005).

1.1   The Life Cycle

On purpose, as each product has a different life cycle, the figure below
does not specify the unit used for time. On purpose too, the figure
reveals a negative profit after the decline stage, thereby meaning that
the product ends up sold at a loss. It is important to have in mind that
this figure assumes R&D and the preliminary work on the product has
been done and that sunk costs have already been incurred. In this model,
product life cycle therefore only commences once the product has been
launched on the market. Prior to launch, R&D is central in order to
identify what product will be launched, when and how. At the pre-launch
stage, R&D and marketing and sales seek to answer the following ques-
tions: what possibilities? What exists on the market? What gap could the
product fill? (Fig. 1).

1.2  Launch
The very first step of a product life cycle is that of the launch when it is
introduced for the first time on the market. During this stage, the prod-
uct is new to the market and needs to be known. A need for this product
from customers must be fostered. Therefore, during the launch period,
the company starts manufacturing the product and does some marketing
on it for the first time.
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  57

Fig. 1  Product life cycle

On the one hand, in order to preserve its technology and other pat-
ents, the company tends to manufacture its product on its own prem-
ises without having recourse to any joint ventures of business partners,
unless long-term partnerships with other companies have been devel-
oped and proved satisfactory. The main strategic risk for the company
is to see its technology or product mimicked by competitors before it
is even associated with its home brand. Preserving one’s technology
through home manufacturing may result in higher production costs than
when this activity is outsourced. At this stage of product life cycle, the
company cannot at yet count on economies of scales and has to incur
massive overhead costs, such as R&D and infrastructure (e.g. factory and
logistics).
As a consequence, apart from rare exceptions where expecting a new
product and queuing for hours or days is part of the experience (see the
launch of the first generation iPhone, iPad, iWatch or the latest issue of
Call of Duty©), production needs to be done in sufficient quantities and
delivered on time. Otherwise, the risk with approximate logistics is that
of frustrating or deceiving customers.
On the other hand, in order to make this new product known to its
clientele, the company incurs significant marketing expenses. This first-
stage marketing is aimed at informing the customers about the existence
of this product. Its properties and its technological contents are adver-
tised in various channels. If this product is aimed at being the leader in
its market or if it is the first of its kind at all, marketing may well borrow
all possible channels so as to announce this novelty.
58  V. JOANNIDÈS DE LAUTOUR

1.3  Growth
Once the product is known on the market, its sales grow. The specificity
of the growth stage is that, if the product is well received on the mar-
ket, sales grow rapidly. The first customers from the launch period, by a
fashion chain effect, encourage others to purchase this new product. At
this stage, selling price usually remains high, since sunk costs and launch
costs are to be absorbed and the product remains exclusive. Yet, pre-
mium solvent customers purchase it regardless of high price. During this
growth stage, most costs previously incurred are being absorbed: R&D,
manufacture overheads and marketing. During the growth stage, whose
duration is unpredictable and depends upon product and technology, the
company continues manufacturing it, fills large inventories and markets
the product to reinforce its popularity to the public.
This growth stage is characterised by increasing sales at a selling price just
below the launch price, and this latter being merely transitory and cannot
last long. Its duration is conditioned by the existence of possible substitutes
on the market, possible new competitors, suppliers’ capability of follow-
ing the pace and delivering the expected quantities on time and customer
preferences (Porter, 2002). If possible substitutes to the product exist or
competitors are active, the threat on the company results in a brief growth
stage. If suppliers are in a capacity of following the growth pace and deliver-
ing, this stage can last until the product is known to customers or compet-
itors. Lastly, if attracting customers is a difficult task and slow, the growth
stage may last relatively long and characterised by low or moderate rates.
However long the growth stage lasts, it ends when the product is known
to the public and the competition, as the market commences to be flooded.

1.4  Maturity
The growth stage arrives at an end when revenues from sales increase at
a slower and more stable pace. At the maturity stage, it takes some time
until sales reach a peak. This stage is usually the longest in product life
cycle. It is the stage where the product is sufficiently known to its market
to be perceived as the reference product and aspires to be the leader. The
company can count on its technological advance and intellectual prop-
erty protection to avert mimicry from competitors. Provided customers
still like the product and no challenger succeeds to develop an alternative
technology and product, the maturity stage can last as long as technology
is protected (Resnik, 2003; Simburg et al., 2009).
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  59

During this stage, most fixed costs and investments incurred by the
company have been absorbed and the break-even point reached. Thence,
the company can afford to so reduce its selling price as to absorbing its
variable costs and secure the desired margin. Whilst the initial two stages
were addressing the product to a premium and solvent clientele growth,
this stage opens to a larger audience. This imposes that selling price be
reduced. In most cases, selling price can be reduced by the amount of
investment costs and overhead costs incurred prior to launch and during
growth. As a result, during this stage, the product operates as a cash cow
for the company (Granlund & Taipaleenmki, 2005).
Given that the product still sells, company operations emphasise large
production, the constitution of inventories to ensure the constant pro-
viding of the desired product, marketing to remind the clientele of this
product’s capacities and R&D to develop the next product (Anderson
& Zeithaml, 1984; Lewitt, 1965; Westkämper, 2000). The growth stage
can be prolonged through technological upgrades to the product or new,
limited editions aimed at attracting new customers or retaining current
ones (Anderson & Zeithaml, 1984; Westkämper, 2000).
At product maturity, it is important for the company to anticipate future
prospects; this stage is not meant to last eternally. Technology protection
shall terminate; challengers may be preparing themselves to dethrone the
company with an alternative and up-to-date technology and product; and
customers may start losing interest in the product. Therefore, at that stage,
the company needs to prepare this product’s aftermath by investing in
R&D and next product’s pre-launch stage (Westkämper, 2000).

1.5  Decline
After a certain time, the product loses its leadership in the market,
which is manifested in decreasing sales. This loss of influence can be
explained by changes in customer preferences and an aspiration for a
new product or service. Such is often the case within the automotive
industry where new models are launched periodically after one has
lost its popularity on the market. In this case, product change is not as
technological as design-related: once a model is perceived as outdated
or too old for customers, a new one can be launched, offering similar
functionalities but presenting a different design (Schöggl, Baumgartner,
& Hofer, 2017; Wochner, Grunow, Staeblein, & Stolletz, 2016; Yang,
Nasr, ong, & Nee, 2017).
60  V. JOANNIDÈS DE LAUTOUR

Regardless of customer preferences, product sales start decreasing

when the technology employed for this product starts being replicated
by competitors offering a similar product at lower rate or arrives at a new
technology and product. Such is generally the case with high-tech prod-
ucts (Prasad, 1993; Weijters, Goedertier, & Verstrecken, 2013), chem-
icals or pharmaceuticals (Hoffman, 1999; van den Bogaard & Spekle,
2003) where technological advance rarely lasts.
When the product starts its decline, the main operational challenge for
the company consists of terminating production and decreasing invento-
ries at the fastest possible pace. Terminating production should make the
production line and shop floor capable of accommodating the upcom-
ing new product whilst emptying inventories is aimed at freeing stor-
age space for this new product. In order to ensure that inventories will
decrease, selling prices is usually reduced; hence, new customers can still
purchase it until it is definitely withdrawn from the market (Anderson &
Zeithaml, 1984; Westkämper, 2000).

Case n°1. Doc Martens

From Growth to Decline

In 1991, Doc Martens launched a model of shoes inspired from
security shoes worn by tradespeople. The sole was made in a spe-
cial rubber with numerous virtues for the security of people wearing
them. Compressed air inspired from Nike was to absorb any shocks
when stepping on sharp items. A secret gel borrowed from Reebok
was to shape the sole for the person’s foot. An anti-twist technology
borrowed from Adidas Torsion was to prevent any muscle or bone
injury. Those shoes were strengthened on the top with a round
metal hull capable of supporting a heavy load. Since after launch,
Doc Martens shoes have become very popular amongst youths and
young adults. Notwithstanding a high selling cost, for three con-
secutive years, sales increase dramatically, these new shoes becom-
ing more popular than the historical Converse All Stars®. In 1993,
other manufacturers started mimicking their original shape, selling
at a lower rate. By the time, Doc Martens’ sales were not too much
affected by these new competitors. Suddenly, in September 1994,
customers no longer had any interest in these shoes, preferring the
new fashionable, lighter and colourful product from Palladium®.
Taking the sudden decline of their lead product seriously, in
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  61

December 1995, the company endeavoured to overcome this sit-

uation by launching new models with different shapes and col-
ours. It was almost too late, customers were disinterested in this
brand and its products, leading the company almost to bankruptcy.
A revival occurred in 2007 when the original models with new
shapes and colours became fashionable again (Escalas & Bettman,
2005; Skott-Myrhe, 2009).

2   What Counts in Product Life Cycle

As strategic concerns and operational issues vary along product life
cycle, what counts and deserves to be accounted for is not definitely set.
Rather, in its capacity of producing figures pertinent for decision-mak-
ing, management accounting evolves pursuant to the momenta of prod-
uct life cycle. This section reveals what the main strategic concerns for
management accounting are at each stage.

2.1   What Counts During the Launch Stage

When the product is being launched, high costs have already been
incurred to develop and market it. Thence, two issues are well accepted.
Firstly, the product cannot be profitable, since it is just starting on the
market. Secondly, it is premature to envisage the optimisation of its value
chain (managing costs). Rather, what is central to management account-
ing during this launch stage are as follows:

– production processes and capability of producing;

– logistics and capability of delivering the product;
– return on marketing.

During this stage, the product can still be considered an investment and
therefore any expense appears as outflows associated with this invest-
ment. Any expense, including manufacturing expenses, should be per-
ceived as lagged investments and therefore not as costs (Anthony, 1952;
Anthony, et al., 1984). Also, during this stage in product life cycle,
the company is unlikely to be broken even; hence, following costs is
not the most relevant management accounting concern. Rather, what
62  V. JOANNIDÈS DE LAUTOUR

management accounting emphasises when the product is just launched

is the pace at which it sells, which can be manifested in periodical
reporting on revenues from sales. This shall allow to determine the
return on current marketing expenses: management accountants should
be in a capacity of deciding whether the product is known to its target
customers.
In the meantime, management control and accounting system need
to trace the processes by which the company is supplied with materials,
manufactures the product and delivers it to clients. At this very stage,
what is central to the following up of operations conduct and corpo-
rate performance lies in the value chain itself. Management accounting
ensures that the provisional and planned value chain is inline with strate-
gic objectives and consistent to facilitate product admission on the mar-
ket (Bhimani, Gosselin, & Ncube, 2005).

2.2   What Counts During the Growth Stage

When the product reaches the second stage of its life cycle, it com-
mences to be popularised and well known to the market. The imper-
ative of being in a capacity of delivering the product on the market
confronting the company at the launch stage is amplified during
growth. An ever-growing number of units are expected on the market,
thereby implying an acceleration of production and logistics. But also,
the newly launched product is expected to be of sufficient quality to be
popular on the market. A new product which would be defective may
not last on its market. In order to ensure that the company is eventually
in a capacity of flooding the market, the management control system
developed and implemented during the launch stage needs to remain in
place and certainly be enriched with more accurate metrics. These may
attend to:

– total production time;

– unit production time;
– time-to-market;

It is the stage at which the company can absorb the fixed costs incurred
with this new product:
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  63

– initial investment,
– launch costs,
– production costs,
– marketing costs.

At this stage, more than just cost, what is central to management account-
ing is when the company is broken even, i.e. when the product starts
being profitable. Therefore, cost accounting during the growth stage
needs to comprehend previous costs relating to the initial investment
(including sunk costs) and current costs. It is implicitly assumed that
inflows from sales during the launch period are to be deducted from the
initial investment and appear as marketing revenues. Profitability can be
accounted for only when the product starts selling on its market, whereby
absorption costing is necessary. All these initial expenses incurred in the
previous stage can now be accounted for and ascribed to unit costs. This
is the main condition under which break-even can be noticed and meas-
ured (Anthony, 1952; Anthony et al., 1984; Hutaibat, Alberti-Alhtaybat
(von), & Al-Htaybat, 2011; Jørgensen & Messner, 2010).
Therefore, alongside costs, management accounting’s emphasis is on
revenue from sales, especially as these are expected to be rapidly and
substantially increasing. The management accounting system in place
needs to trace on a periodical basis how much money has been gener-
ated from product sales. Through these periodicals accounts of sales,
what can be followed up is the turnover generated from this product
(Yan & Dooley, 2013). At that stage of product development, the mar-
keting department is transformed from a pure investment centre into
a profit centre: its expenses must result in product popularity on the
market and measured through revenue from sales (Anthony, 1952;
Anthony et al., 1984).
Depending on the industry and type of product, periodicity can vary:
from daily to monthly. The assumption underlying this difference in report-
ing time orientation is that the sooner a technology is likely to be threat-
ened the more frequent reporting on revenues from sales is necessary. As
indicated above, this is especially vivid in the case of high-tech products,
those including chemicals (Laine, 2009; van den Bogaard & Spekle, 2003),
pharmacy (Sabatier, Mangematin, & Rousselle, 2010; Schweizer, 2005) or
energy, not just telecoms (Smith, Collins, & Clark, 2005).
64  V. JOANNIDÈS DE LAUTOUR

2.3   What Counts During the Maturity Stage

A product is mature from a strategic viewpoint when it operates as
a reference on its market and attracts competitors and possible substi-
tutes (Porter, 2002). Seemingly, product popularity is such that, not-
withstanding technology patenting and intellectual property protection,
competitors can arrive at a similar product without incurring the same
pre-launch costs. At this stage of product life cycle, pre-launch costs have
supposedly been already absorbed (McGahan & Porter, 2002). This
commencing competition raises major management accounting issues
and challenges.
The first issue confronting management accounting when the prod-
uct is mature consists of an imperative to optimise the value chain so
as to meet competitors’ standard selling price and thereby costs. When
its product is mature, the company no longer fully controls its sell-
ing price on the market. Therefore, management accounting sets out
to apply a form of target costing. Management accounting reports
emphasise unit cost under the purview of maintaining only those rel-
evant costs, viz. costs directly relating to activities perceived as central
to company core business in the value chain. Those other costs seen as
peripheral or manageable are under management accounting’s scrutiny,
warnings on those being issued to advise on the possibility of reducing
them, e.g. by outsourcing or locating to a region or country where
such costs are lesser (Mouritsen, Hansen, & Hansen, 2001). In other
words, the nature of any activity pertaining to this particular product
changes from a profit centre to a cost centre (Anthony, 1952, 1965;
Anthony et al., 1984).
Selling prices shifts from being a control lever to a lever of organisational
design and architecture (Simons, 1987a, 2000). This implies that compa-
nies operating on a market where the product is mature implement bench-
marking policies and technologies and conduct economic intelligence.
Without such benchmarks coming from management accounting, knowing
what the market’s cost structure appears as a difficult, if not an impossible,
task (BBRT, 2009a; Wouters, Kokke, Theeuwes, & van Donselaar, 1999).
As the implementing of benchmarks is in its essence a comparison against a
market standard and competitors, associated relative measures are added to
the existing management accounting system. Standard costs are market and
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  65

competitors costs; the value chain progressively aligns itself with market
standards and competitors’ practices. In order to enable this aligning and
adapting to market circumstances, management accountants develop rela-
tive accounting costs and performance measures (Hartman, 2000; Kattan,
Pike, & Tayles, 2007; Otley & Fakiolas, 2000).
Even though selling price progressively imposes itself to a mature
product, the company can count on its reputation on the market to sell
at a relatively higher rate than competitors, thereby emphasising a differ-
ence owing to know-how, tradition and quality (Chalmers & Godfrey,
2004; Jönsson, 1996). Under this purview, at the same time as value
chain optimisation is accounted for, value creation and profit generation
from sales are thoroughly followed up by management accounting. This
responds to a dual imperative confronting the company whose product
has become mature. Firstly, although the break-even point has suppos-
edly already been reached, the product is expected to operate as a cash
cow for the company: it must sell well. Secondly, this product is sup-
posed to be profitable for a sufficiently long period of time; hence, rev-
enues from its selling can subsidise the R&D on next products. Thence,
revenues from sales are continually scrutinised and reported to manage-
ment. Given that cost and selling price decrease, profit comes not from
sales expressed in value but in volume, which implies an increase in pro-
duction and an additional focus on processes and inventory rotation for
management accounting.
It is within this context that budgeting and budgetary control appear
as a necessity to a number of companies, managers viewing them histor-
ically as technologies enabling them to cope with environment uncer-
tainty (Berland & Chiapello, 2009; Berland, Joannidès, & Levant,
2015). Standard costs imposed by the market or competitors almost
force companies to account for the compatibility of their operations with
these through the Master Budget and CVP-and-variance analysis (Budde,
2009; Emsley, 2000, 2001; McGahan & Porter, 2002).
Paradoxically, because the product can operate as a cash cow, it gen-
erates an unstable and unpredictable environment by fostering compet-
itors’ appetite. All told, when the product reaches maturity, company
management control and accounting system becomes more and more
sophisticated and comprehensive, focusing on costs, quantities, profit,
processes and quality.
66  V. JOANNIDÈS DE LAUTOUR

2.4   What Counts During the Decline Stage

After a certain time, product sales start decreasing: it is the decline stage
in its life cycle. Decline cannot be predicted but anticipated through
the development of new technologies or substitutes to the prod-
uct on its market. Such can be the case when appetite for this product
leads numerous companies to act as followers, manufacturing a similar,
cheaper and less qualitative product. When that momentum commences,
customers seem to know less and less the difference between the origi-
nal product and that from these followers. Complaints re product quality
can start arising on the market and severity vis-à-vis the original prod-
uct be sharper (Maguire & Hardy, 2009). Being flooded with a growing
number of cheap substitutes, the market seems to accept far less the orig-
inal product and its high selling price, especially as compared to follow-
ers’ cost domination strategy (Anderson & Zeithaml, 1984; Westkämper,
2000). Such generally happens with high-tech products. Or, regardless
of competitors, the product can just be less and less popular or fashion-
able and no longer attract customer interest.
In either case, when management understands decline is engaged,
management accounting’s concerns change. It is time to terminate this
product and transition to the next, which is supposedly ready to start and
replace it. During this whole stage, the main concern is to stop produc-
tion and any new investments on this product (e.g. marketing) and sell it
out quickly. As the product has long been broken even, cost is no longer
an issue per se. What could accelerate product’s selling out is a decrease
in its selling price, even if this leads to incurring losses on the final sales.
Management accounting’s focus remains profit with a special emphasis
on the identification and anticipation of future losses; hence, remaining
units can be destroyed and accounted for as losses measured as its varia-
ble costs only (Westkämper, 2000).
At the same time, as management accounting follows up time to
losses on the product, inventory accounting becomes a central concern,
since warehouses supposedly need to be emptied in order to accom-
modate the next product. This new emphasis on inventory accounting
results in an additional focus on logistics and their capabilities of freeing
warehouse space. The figure hereafter summarises product life cycle and
accounting issues (Fig. 2).
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  67

Fig. 2  What counts in product life cycle

In the aforementioned figure, the X point in the middle of the growth

stage pinpoints when the product is broken even and can start being
profitable. The ellipse between the dotted curve representing costs and
the continuous curve left to the break-even reveals the investment made
by the company during the launch stage. The ellipse right to the break-
even point conveys the profit margin generated from the product. This
profit is at its highest during the maturity stage and diminishes until
the “stop” point is reached: when selling the product is at a loss. It is
time to terminate this product and allow the next one to replace it. It is
important to notice that, even though the product is declining and profit
decreases, losses do not occur at the beginning of this stage. The decline
stage can be characterised by the law of diminishing returns: every addi-
tional unit sold is less profitable than that preceding it. The figure below
summarises management accounting’s concerns and evolution at each
stage in product life cycle (Fig. 3).
68  V. JOANNIDÈS DE LAUTOUR

Stage in life What counts as strategic Management control and

cycle accounting

Launch - Product placement and - Production processes and

promotion;
Investment - Technology patenting;
centres - Intellectual property
protection;
- Exclusive product;
- High selling price.
capability of producing;
- Logistics and capability of
delivering the product;
- Value chain consistency;
- Return on marketing expenses;
- NO cost accounting

Growth - Return on intellectual - Time - driven accounting;

property;
Profit centres - Units manufactured;
- Lower selling price;
- Reminding of product’s
characteristics;
- Reputation building.
- Inventory accounting;
- Time - to - market;
- Breakeven analysis (absorption
costing);
- Return on marketing expenses
(performance measures);

Maturity - Return on reputation; - Benchmarking;

- Large sales;
Cost centres - Lower selling prices;
- Reminding of product
characteristics;
- Loss of technology and
market leadership;
- Checking the
competition;
- Preparing for the next
product.
- Relative performance measures;
- Target pricing and costing;
- relevant costing (variable
costing);
- Value chain optimising;
- Budgeting and budgetary control
(CVP analysis);
- Profit margin;

Decline - Abandoning the product; - Loss planning;

- Preparing for the next - Inventory accounting;
Loss centres product - Time - driven accounting

Fig. 3  Product life cycle accounting

3   Target Costing

Owing to a product life cycle over which the company has no control,
selling price, and thereby cost, appears as externally imposed. Total cost
and selling price find themselves driven by the five forces operating on
the market: competitors, customers, substitutes on the market, suppliers
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  69

and the possibility of new entrants (McGahan & Porter, 2002; Porter,
2002). This externality of cost and selling price results in an imperative
to apply target costing so as to fit with market requirements. Whilst tar-
get costing principles are well known and understood, its implications for
value chain management are less. This section therefore reconstructs all
this, by first reminding of the principle itself, followed by insights into
strategy’s influences on cost and selling price, which leads to discussing
the implications on value chain management and operations.

3.1   The Target Costing Principle

The principle of target costing is well known and comprises of three
steps and a formula. The first step consists of determining a selling price
that should apply to the product. This is usually done by a joint work
between management accounting and the marketing department. This
target selling price results from market studies and appears as the selling
price at which the product can be purchased (Gagne & Discenza, 1995;
Niedrich, Sharma, & Wedell, 2001; Rajendran & Tellis, 2001). Whilst
this principle is clear, it is much less how this target selling price is set.
The marketing department supposedly identifies at what price the prod-
uct can be sold and in what quantities given market structure. This first
step whose conclusions—selling price—are usually taken for granted is
the offshoot of a joint operation from R&D developing a new product,
marketing and management accounting (Jørgensen & Messner, 2010).
Once the target selling price is set, the second stage of target cost-
ing can occur: defining a target margin. That is, for whatever reason,
the company rests its business operations upon a standard margin which
should apply to its products. The margin rate is set in advance and is to
be honoured. It is then on the basis of this standard margin that stand-
ard costing, budgeting, budgetary control and performance manage-
ment are applied (Cooper, 2017; Cooper & Slagmulder, 1999; Everaert,
Loosveld, van Acker, Schollier, & Sarens, 2006). The second question
left unanswered is that of how this target margin is set. There are usually
two options to a target margin. When the company is one competitor
amongst others on its market, the standard margin is usually the same as
the industry’s: a ratio of costs against turnover expressed as a percentage.
The second option, if the company is in a position of not following
the market, because it is a leader or because it rests upon a differentia-
tion strategy, management can set the target margin of their own. Again,
this target margin appears as a ratio of costs against turnover. In this
70  V. JOANNIDÈS DE LAUTOUR

particular case, where the company is not so much under market con-
straints, the target margin can differ from what other competitors being
price takers would incur and be higher (Cooper, 2017). In this specific
case of the company not being price taker, this higher target margin can
serve for multiple purposes but remains as a standard margin to be met:
total costs should not exceed this margin. The first aim of such a target
margin can be the absorption of fixed costs, especially R&D and mar-
keting costs incurred at product life cycle earliest stage. Such is the case
when the product is a leader on its market or expected to become so; this
can occur during the growth stage or the maturity stage in its life cycle,
until other competitors impose lower selling prices and therefore margins
(Westkämper, 2000).
Depending on the stage in product life cycle, either target margin
or target costs vary. During the growth stage, in order to follow up the
break-even point, the target cost should comprehend all costs incurred,
including fixed costs, investments and possible sunk costs. That is, the
target cost is defined as an absorption target cost. At product maturity,
the company is broken-even; hence, the target cost no longer needs to
include initial investments and fixed costs. This is where, depending
on company position on the market, either the target is cost or mar-
gin. When the mature product attracts many competitors endeavour-
ing to dominate by costs, the target imposed on the company is cost.
Conversely, when new competitors join this mature market because they
can have a share therein, the leading company can set a target margin
increasing over time, as fixed costs no longer need to be accounted for
and allocated to the product itself.
In sum, what is usually understood as target costing is more complex
than it appears, insofar as it is not just cost itself that counts. And even
the boundaries of this cost are not perfectly clear: total, fixed, variable?
The inclusion of which costs need to be accounted for is contingent
upon corporate strategy and stage in product life cycle. In other words,
the target cost itself varies over time and requires a strategic reflection on
target selling price and target margin as well as an accounting reflection
as to what needs to be accounted for and how. As always with strategic
management accounting, what matters is to identify what counts as stra-
tegic in target costing. Thence, what is known of target costing is the
following formula:
Target Cost = Target Selling Price − Target Margin
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  71

Case n°2. A restaurant chain…

On Target Margin Imposed
In a famous UK restaurant chain, the dishes served do not differ-
entiate themselves significantly from those served by competitors.
Clientele is the same from one competitor to another, resulting in
product and prices being perfectly aligned. Also, in the restaurant
industry, profit margin is more or less observed as 30% standard.
Consequently, costs are imposed by the profession. To this end, in
this restaurant chain, for each dish, management attentively con-
trols all material, labour and overhead costs and efficiency. When a
dish is no longer profitable, it finds itself removed from the menu
and is replaced with a new one, expected to generate more reve-
nue. When this new dish starts being profitable in one chain, other
competing chains tend to mimic and serve it, progressively impos-
ing a standard selling price and cost that the launcher is to fol-
low. This is how in restaurant chains there is a regular turnover of
dishes. The dish target cost operates as management accounting’s
working unit (Ahrens & Chapman, 2002).

3.2   Identifying the Cost Structure

The target cost set for a product is the maximum total cost the company
can incur and usually comprehends the cost of materials, cost of labour
cost of overheads. Having said that, it is unclear at this stage to what
to each of these costs corresponds and implies. Therefore, target costing
needs, as part of corporate strategic positioning, must be accompanied
with a strategic reflection called strategizing (Chua, 2007; Jørgensen &
Messner, 2010; Parker, 2013; Wright, 2008).
Within this reflection, rather than the total cost, what counts are all
its components. In this case, the usual classification of costs whereof the
product comprises is not very insightful and does not really allow for
any decision-making (Anthony et al., 1984), because it is characterised
by a certain amount of vagueness (Colwyn Jones & Dugdale, 2001;
Jones & Dugdale, 2002). Instead of relying on such a vague and not
operational classification of costs, the product cost structure must be
understood.
72  V. JOANNIDÈS DE LAUTOUR

In order to identify product cost structure, its own value chain, dif-
ferent from company value chain needs to be designed. That is, target
costing is necessarily associated with the organisational design implied
by this product (Simons, 2005, 2010). Designing the product value
chain is aimed at identifying those costs that are relevant to the prod-
uct itself but also those costs that are considered strategic and must
be internalised. Conversely, costs deemed irrelevant to the product
or not strategic can be taken off the value chain. This leads to man-
agement accounting’s usual question of make or buy (BBRT, 2009b;
Lamminmaki, 2008; Nicholson, Jones, & Espenlaub, 2006; Sartorius &
Kirsten, 2005). Whilst this traditional question of make or buy usually
relates to company performance and know-how target costing poses the
question of which links in the value chain are strategic enough to be
maintained within on corporate premises and which ones are not and
can therefore be outsourced (Simons, 1987b, 1990, 1991; Simons &
Davila, 1998).
Identifying the product value chain consists of determining which
cost drivers are critical to the organisation and deserve to be maintained
on corporate premises. Depending on the company’s core business and
strategic concerns, these critical cost drivers vary. In other words, as
Transaction Cost Economics claims, what deserves internalising is any
activity specific to the company, viewed as a specific asset inevitable for
value creation (Williamson, 1979, 1981, 1985).
For instance, IT costs in most organisations can be outsourced to
supplier companies with various forms of contracts (paying for a con-
sultant, paying for an external service, paying for an IT system and a per-
manent consultant, renting an IT installation and maintenance services,
etc.) Such is possible in companies where IT is not critical and does not
relate to core business activities. Thence, a company whose core business
activity relates to IT cannot afford to outsource it (Lacity & Hirschheim,
1993). Microsoft, Apple or any technology start-up is less than likely
to outsource this cost driver on its products. The same logic applies to
every single link in the value chain. When related to a specific product,
strategic cost drivers and links in the value chain vary from one item to
another, and this depending namely of each stage in its life cycle as well
as its strategic positioning.
When the product is being launched and grows, the company has not
absorbed yet its initial investment and fixed costs and is concerned about
protecting its technology and know-how. Therefore, anything relating to
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  73

manufacturing is likely to be maintained on corporate premises, so that

no competitor be likely to prematurely have access to the core of this
specific knowledge.
Outsourcing this puts the company at risk of losing its competitive
advantage (Montgomery & Porter, 1991; Porter, 2008, 1986).
This implies the accepting of a cost structure in which manufactur-
ing costs would represent a fairly high amount of the target cost. Still,
when the product is growing, the company’s main strategic challenge
consists of its capacity to supply the market and deliver the expected
quantities on time. Thence, in order to avoid any risk of losing control
of the supply chain, the company is more than likely to internalise logis-
tics. Outbound logistics in its capacity of delivering the final product to
the market needs to be internalised. Likewise, inbound logistics in its
capacity of supplying the company with expected materials needs also to
be internalised. For management accounting, internalising a link results
in it becoming a fixed cost operating like an overhead cost. Conversely,
outsourcing a link in the value chain is similar to taking it as a full var-
iable cost. When the cost of a link in the value chain is variable, as any
other cost, it remains fully manageable; it is possible to call on compe-
tition to optimise it. Conversely, when the cost of a link in the value
chain operates like a fixed or overhead cost, it loses its manageability
and is then borne or undergone by the company (Lamminmaki, 2008;
Langfield-Smith & Smith, 2003; Nicholson et al., 2006; Sartorius &
Kirsten, 2005; Shy & Stenbacka, 2003).
Noticeably, not every cost can be outsourced in the view of opti-
misation, namely when there is a risk of losing control of corporate
competitive advantage. In suggesting a maximum cost that the prod-
uct can bare, target costing does by no means suggest that any cost
must be compressed. To some extent, target costing can be summa-
rised through a formula slightly different to the one usually taught in
textbooks:
Target Cost = Target Selling Price − Target Manageable Costs − Strategic Costs
The manageability or unmanageability of these strategic costs can lead
one to rewrite this formula, using different concepts having however the
same signification.

Target Cost = Target Selling Price − Target Manageable Costs − Fixed Costs
74  V. JOANNIDÈS DE LAUTOUR

3.3   Designing the Product Value Chain

It proceeds from the cost structure aimed at reaching the target cost the
product value chain. What is strategic to this product, given the strategic
concerns and constraints of the time, shall be included into the product
and its total cost. In this case, two situations may arise, where manage-
ment accounting plays a central role.
The first possibility occurs if the integration of every single strategic
link in product value chain falls within the scope of the target cost. In
this situation, management accountant’s role embraces a new dimension,
viz. following up the costs of the product’s own value chain. In addi-
tion to management accounting concerns implied by corporate strategy
and product life cycle, cost accounting systems need to be implemented.
Within such costing systems, the target total cost operates as a standard
cost and means of falling within its scope drives the product’s budgetary
process as well as budgetary control (Berland, 1998; Berland & Boyns,
2002; Berland & Chiapello, 2009).

Case n°3. Smart City

On Value Chain Integration

When the first Smart car was launched and for the first couple of
years of its growth on urban markets, the company was producing
one product only. Thence, product and corporate value chain could
conflate. Given design originality and technological secret enabling
to reduce vibrations on such a small and light car, every single link
in the value chain appeared as strategic and would therefore be fully
integrated. This resulted in the construction of Smart City, a pre-
cinct dedicated to Smart activities. This village’s originality con-
sisted of its designing pursuant to the value chain. At the precinct,
entrance was headquartered the logistics department placing orders
and receiving materials. Once received and unwrapped, these were
placed on a trail leading to warehouses where they would be stored
until production calls them. Another trail would then lead materi-
als to the factory house where they were assembled and cars fabri-
cated. Then, the end product was placed on a different trail leading
to the quality department for testing. At the exit of Smart City was
the outbound logistics receiving orders and dispatching cars to cli-
ents. With this model, Smart was securing its technology and aiming
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  75

at compressing costs relating to quality management. By controlling

the entire process, Smart would not allow for defect cars damag-
ing their brand image. As the audience targeted was that of solvent
urban yuppies, a Smart car could be perceived as a fashionable object
deserving a high selling price. On the urban car market, selling price
was c.20% higher than that of competitors, which enabled the incur-
ring of higher costs at the beginning. Smart City was made possible
because customers could afford a more expensive car (Lewin, 2004).

The second possible situation, which is most likely to occur, is that where
integrating every single strategic link into the product’s value chain results
in a total cost exceeding the target cost, now operating as a standard cost.
What then confronts management accounting is an imperative to optimise
the product value chain worldwide. In this case, management accountants
need to review every single process and link in this value chain and trace
target costs, efficiency and profitability for each of them. In the meantime,
countries with a competitive advantage for each link in this product’s
value chain can be selected to host it (Porter, 1998a, 2008). Management
accountant’s role embraces a new dimension, viz. reviewing processes,
doing international benchmark and accounting for a global competitive
advantage (Bowman & Toms, 2010; Lehman, 2009). This notion of
product value chain can be summarised in Fig. 4.

Fig. 4  Product value chain

76  V. JOANNIDÈS DE LAUTOUR

In the product value chain’s designing, not all links need to be located in
low-cost countries but in countries where the company can build a compet-
itive advantage for a certain activity. This ability is contingent upon corpo-
rate strategy and stage in product life cycle. As the target cost only applies
at the soonest during the growth stage but more often at product maturity,
the implications for the company and its product value chain vary. When a
target cost appears as constraint during the growth stage, most links in the
value chain are strategic (from R&D to logistics, including production) and
must be integrated. This said, locating some of these for-now-still-strategic
links to a country with a competitive advantage may put the company or
the product itself at risk of losing its own competitive advantage. The risk
consists of local partners or units not necessarily abiding by corporate pro-
cedures or policies. Such loss of control over local partners may undermine
company positioning, especially if quality does not meet corporate stand-
ards or affect brand reputation if logistics cannot deliver rapidly growing
quantities of the product. Or, even worse would be the situation where the
local partner or subsidiary takes its autonomy and decides to use the tech-
nology specific to its parent company’s product to manufacture and sell it
on its own, thereby illegally using patents and fabrication secrets for their
own benefit (Chang & Hwang, 2002; Joseph, 2006).

Case n°4. Danone

Product Value Chain and Loss of Control
In the early 2000s, Danone was locating in China the assemblage
of milk and fruits in its lead yoghourt, known under different
names from one country to another. This was aimed at selling a
new product with some health-oriented merits at a price acceptable
to the market. R&D was maintained on headquarters’ premises in
France, considered too strategic to be shared. After a few months,
it appeared that this growing product, selling extremely well.
Suddenly, the product stopped selling in most countries where it
was positioned. Danone’s management discovered that the subsid-
iary was eventually selling the product for its own benefit at the
same time and at a lower rate than the parent company would. The
technology found itself accidentally stolen and illegally utilised the
subsidiary operating in the country where production was located
without Danone being able to really react. After this incident,
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  77

Danone and a series of other leading companies decided to relocate

to headquarters’ premises the manufacturing or assembling of their
growing or leading products so as to avoid lose control over their
own technology perceived as strategic. Since then, Danone and
most companies have located outwith headquarters’ premises the
production of elder generation products whose maturity has been
proofed, hence the possible loss of this technology would not be as
endangering as for a lead product (Meschi, 2004).

3.4   Designing the Adequate Management Control System

The revised cost structure and value chain implied by the conjunction
of target costing and the management of product life cycle results in a
different way of conceiving the company from a management accounting
viewpoint.

3.4.1 The End of Responsibility Centres

Traditionally, a company is organised around responsibility centres char-
acterised by their own value drivers (Anthony et al., 1984). Traditionally,
operating departments, defined as responsibility centres, have unique
inputs and outputs measured in monetary terms. These centres are man-
aged by responsible managers commissioned to manage and measure
their performance based on monetary terms. Inputs are resources needed
and used measured by costs (such as material, labour hours and related
services) to produce a desired output that could be tangible, such as fin-
ished goods, or intangible, such as services in order to generate revenue
or provide internal services. Therefore, inputs in responsibility centres
are usually expressed as costs. Outputs can most of the time be expressed
as revenue or value creation. What has traditionally been at management
accounting’s core is the measurement of various outputs to inputs ratios,
i.e. what costs should be incurred for the amount of measured output.
Anthony et al. (1984) notes four types of responsibility centres
around which management accounting has traditionally been organised:
expense centres, revenue centres, profit centres and investment centres.
In an expense centre, management is responsible primarily for expense
control, which has led to the most-known form of cost and managerial
78  V. JOANNIDÈS DE LAUTOUR

accounting. In a revenue centre, where management is responsible

for output management and measure: revenue generated (e.g. sales
force). In a revenue centre, as costs do not matter so much, manage-
ment accounting focuses on revenue generation. In a profit centre,
management is responsible for the profit margin, i.e. the bottom line
after expenses have been subtracted from revenue. There, management
accounting has the dual focus of the other two types of responsibility
centres and certainly offers the most comprehensive view. In addition
to this, profitability measurement rests upon a tracing of management
performance and economic performance. To Anthony et al. (1984), this
dual performance is central to profit centres, inasmuch as management’s
personal performance measurements (hence personal interest in the busi-
ness) drives how a company views costs and expenses. Since profitabil-
ity is a major measure of management performance, reduction, control,
and optimisation of costs and expenses become a priority, and eventually
firm strategy. Lastly, in an investment centre, the same logic as in a profit
centre applies to capital expenses. Management accounting’s role consists
of modelling and controlling the return of this capital expense, under-
stood as an investment. Basically, two types of measures appear as central:
return on investments and residual income.
Since the value chain has applied to the company as a whole, each
responsibility centre would relate more or less to functional depart-
ments. Some departments are allegedly spending whilst others are known
for generating revenue. Traditionally, spending departments are those
considered less useful when the product finds itself no longer growing
but either being mature or declining. Such is often the case of market-
ing or R&D (Anthony, 1952). The management accounting treatment
of a production department has been ambiguous, and this activity being
often perceived as a source of expenses in labour, material and overhead,
at the same time as it is the main source of revenue. Without production,
no revenue driver.
With the advent of product value chain implied by life cycle account-
ing and target costing, the notion of responsibility centres has changed
entirely and led to Activity-Based Accounting and Activity-Based
Management too often collapsed to Activity-Based Costing (Alcouffe,
Berland, & Levant, 2008; Armstrong, 2002; Evans & Ashworth, 1995;
Hixon, 1995; Lukka & Granlund, 2002).
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  79

3.4.2 Product-as-Activity-Based Management Accounting

Given product life cycle and the progressive imposition of its target cost,
the product finds itself at the core of management accounting. From
then on, it is its cost, its revenue and its profitability that are measured.
But also, as a new product is being launched when the current lead prod-
uct is mature or is about to decline, at least two product value chains
shall coexist, one for each. Within this context, it becomes difficult to
envisage a mere overarching management control system organised
around departments functioning in silos. It is not the cost of marketing
or the revenue from general sales that are central. Rather, what counts
can be marketing cost and returns on a specific product and at a spe-
cific stage in its life cycle. Thence, the product itself becomes the value
driver, thereby including investment, cost and revenue, all this ultimately
leading to profit. The product consumes resources from existing depart-
ments, and it is this consumption that is accounted for by management
accounting.
The product counts on its own value chain and possibly consuming
some overhead costs incurred by the headquarters (e.g. IT, HR and
maintenance). The figure below summarises this first option. In this
option, depending on the stage in its life cycle, the product operates as
an investment centre (launch), a revenue centre (growth), a profit cen-
tre (maturity) or a cost centre (decline). The value chain is organised
worldwide pursuant to the target selling price imposed to it by market
forces and competition (Porter, 2002, 2008). Some links in one prod-
uct’s value chain may be absent from another’s where it is not or no
longer strategic. For instance, production or logistics on a mature prod-
uct is not as strategic on corporate premises as for a growing product.
But also, this product consumes overhead services from the company’s
own value chain.
In either case, value chain optimisation and the progressive trans-
formation of the product-as-responsibility centre into a profit cen-
tre results in this activity purchasing services from the company itself.
Supporting departments change in nature from functional towards
service departments charging for their own activity, which is known
as transfer pricing (Cools, Emmanuel, & Jorissen, 2008; Dikolli &
Vaysman, 2006; Meer-Kooistra, 1994; Rossing & Rohde, 2010)
(Fig. 5).
80  V. JOANNIDÈS DE LAUTOUR

Fig. 5  Activity-Based Management

3.4.3 Product-as-Responsibility-Centre and Shared Service Centres

It can occur that the product-as-responsibility-centre is integrated into
the company’s value chain and thereby consumes corporate resources.
Depending on which stage in product life cycle, the product itself can be
an investment centre, a profit centre or a cost centre. In this context, the
product does not have a full independent value chain and purchases ser-
vices from other departments in the company. It is then corporate man-
agement accountants’ role to determine the amount the product shall be
charged. This is a major change as compared to conventional management
accounting where each department-as-responsibility centre’s costs are allo-
cated to products, utilising an allocation rate always subject to discussion
and contesting. With arbitrary allocation rates, the computation of a prod-
uct’s total cost is always an estimate and does not give a fair glimpse of its
financial situation (Chandler & Deams, 1979; Rossing & Rohde, 2010).
An implication of target costing and related Activity-Based
Management is that infrastructure and overhead costs appear as drivers
of product activity and charged accordingly. As with utility bills, it is the
amount of resources needed that is charged. Corporate infrastructures
and support departments operate as shared service centres. These centres
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  81

would charge the product pursuant to their own financial needs to oper-
ate. That is, depending on their own activity, they may or not charge for
the consumption of their overhead costs (Davenport, 2000; MAl-Subhi
Al-Harbi, 1998). Here, the difference as compared to transfer pricing
is that each department operates like a service provider and the product
itself as a client. The internal client is charged as would any other external
client, so that management could theoretically also call on external pro-
viders for the same service. The notion of target cost would consequently
apply to each shared service centre, as though they were subject to an
imperative of aligning their rates and therefore practices and internal costs
with those of external competitors (Bergeron, 2002).
The literature generally emphasises the merits of shared service centres
in relation to efficiency gains and savings enabled through mutualisation
(Farndale, Paauwe, & Hoeksema, 2009; Triplett & Scheuman, 2000).
Although this merit is not to be disputed, this emerging practice can be
directly and tightly associated with the implications of target costing and
product life cycle accounting. Given the imperative of controlling target
cost’s components, the model of shared service centres can be presented
as one enabling cost optimisation. Outwith pressures from external com-
petitors that should lead these in-site departments to review their own
costs, shared service centres are useful for mutualising some expenses
(Wang & Wang, 2007). Their internal profitability lies in the volume
and value of their operations: either high value-added activities or high
amount of orders received and processed. In the first case, profitability
results from economies of scales that can be achieved internally whilst
the second case reveals a competitive advantage the company creates and
sustains (Porter, 1998b).
Where target costing, product life cycle and share service centres
intersect is mostly in case of multi-product companies where different
products are at different stages in their life cycle. Given differentiated
profitabilities at different stages in life cycle, shared service centres may
allow for cross-subsidising products being launched or growing but not
broken-even yet. In this case, the rationale for having recourse to shared
service centres is that some activities cannot strategically be outsourced
and are not necessarily in a capacity of being profit centres per se. In
return, as yet non-profitable products could not afford external services.
Through shared service centres, a mature product operates like a cash
cow for the company, thereby absorbing part of other products’ costs
until these become broken-even.
82  V. JOANNIDÈS DE LAUTOUR

Case n°5. InfoSys and Philips

Shared Service Centres
In 2008, Philips is confronted with products being unequally profita-
ble and the imperative of reducing costs. In order to achieve this cost
reduction and improve on its products’ efficiency, Philips launched in
2009 a Shared Service Centre with InfoSys, a former external service
provider. The Shared Service Centre called SBSF provides both com-
panies with HR, IT and administration, so that Philips and InfoSys’s
internal value chain only comprises of those of their respective prod-
ucts. Large economies of scales have been enabled.

Source Author adapted from InfoSys partners with Philips in the

journey to transform their Shared Service Centers. 2011.
 2  PRODUCT LIFE CYCLE ACCOUNTING AND TARGET COSTING  83

4  Conclusion
In management accounting, the strategic reflection pertaining to the
product itself is overlooked, as though this product were an abstrac-
tion or a reality external to the company. Yet, the product is central to
it, since it is the main source of revenue and profit, even before being
a cause for costs. When considering the product as the core of busi-
ness concerns and operations, it appears that its life cycle needs to be
understood and the way its selling price and associated standard cost
are set. This necessarily raises the question of target costing, far beyond
the well-known formula taught in managerial accounting courses. This
formula has major implications for organisational design and manage-
ment accounting. Far from being a mere abstraction or speculation, this
is vivid, the target cost proceeds from corporate strategic positioning,
itself being collapsed to each stage in product life cycle. It also proceeds
thence most operational and financial decisions made by management.
Target costing necessarily leads to identifying the relevant cost struc-
ture for this product by determining which costs are strategic and which
ones are not, thereby leading to the design of the ideal value chain for
this product. This ad hoc value chain leads to the adoption of specific
controls and management accounting systems especially suitable for this
product at that particular time. As target costing takes different mean-
ings and forms at each stage in product life cycle, both its contents and
shape vary over time. Controls cannot be rigid over time but do evolve
concomitantly to the core product. It is the product that drives strategy,
operations and controls (Fig. 6).

Fig. 6  Target cost-

Stage in
ing as value chain life cycle
accounting

Controls Target
cost

Value Cost
chain structure
84  V. JOANNIDÈS DE LAUTOUR

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