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The sufficiency of target costing for evaluating production-related decisions

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  • Kee, Robert

Abstract

Target costing is a cost management system designed to develop products with a level of profitability deemed adequate to justify their production. This paper examines whether production-related decisions made with target costing consistently add economic value to the firm. A traditional target costing model is compared to one that incorporates the cost of capital. An analysis of the two models reveals that the traditional target costing model systematically underestimates the marginal cost of invested funds and overestimates the marginal cost of cash-related production resources. A numerical example and graphical analysis demonstrate that a traditional target costing model can lead to accepting products that have a negative net present value, while rejecting products that have a positive net present value. Mathematical analysis of a traditional target costing model indicates that it is a systemic property of the model.

Suggested Citation

  • Kee, Robert, 2010. "The sufficiency of target costing for evaluating production-related decisions," International Journal of Production Economics, Elsevier, vol. 126(2), pages 204-211, August.
    • Handle: RePEc:eee:proeco:v:126:y:2010:i:2:p:204-211
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    References listed on IDEAS

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    1. Ibusuki, Ugo & Kaminski, Paulo Carlos, 2007. "Product development process with focus on value engineering and target-costing: A case study in an automotive company," International Journal of Production Economics, Elsevier, vol. 105(2), pages 459-474, February.
    2. Ax, Christian & Greve, Jan & Nilsson, Ulf, 2008. "The impact of competition and uncertainty on the adoption of target costing," International Journal of Production Economics, Elsevier, vol. 115(1), pages 92-103, September.
    3. Dekker, Henri & Smidt, Peter, 2003. "A survey of the adoption and use of target costing in Dutch firms," International Journal of Production Economics, Elsevier, vol. 84(3), pages 293-305, June.
    4. Filomena, Tiago Pascoal & Neto, Francisco Jos Kliemann & Duffey, Michael Robert, 2009. "Target costing operationalization during product development: Model and application," International Journal of Production Economics, Elsevier, vol. 118(2), pages 398-409, April.
    5. Yasuhiro Monden & Mahmuda Akter & Naoto Kubo, 1997. "Target Costing Performance Based on Alternative Participation and Evaluation Methods: A Laboratory Experiment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 18(2), pages 113-129.
    6. Yoshikawa, Takeo & Innes, John & Mitchell, Falconer, 1994. "Applying functional cost analysis in a manufacturing environment," International Journal of Production Economics, Elsevier, vol. 36(1), pages 53-64, August.
    7. Afonso, Paulo & Nunes, Manuel & Paisana, António & Braga, Ana, 2008. "The influence of time-to-market and target costing in the new product development success," International Journal of Production Economics, Elsevier, vol. 115(2), pages 559-568, October.
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    Cited by:

    1. Heinz Ahn & Marcel Clermont & Stephan Schwetschke, 2018. "Research on target costing: past, present and future," Management Review Quarterly, Springer, vol. 68(3), pages 321-354, August.
    2. Chou, Jui-Sheng & Tai, Yian & Chang, Lian-Ji, 2010. "Predicting the development cost of TFT-LCD manufacturing equipment with artificial intelligence models," International Journal of Production Economics, Elsevier, vol. 128(1), pages 339-350, November.
    3. Odysseas Pavlatos & Hara Kostakis, 2022. "Exploring the Relationship between Target Costing Functionality and Product Innovation: The Role of Information Systems," Australian Accounting Review, CPA Australia, vol. 32(1), pages 124-140, March.
    4. Yazdifar, Hassan & Askarany, Davood, 2012. "A comparative study of the adoption and implementation of target costing in the UK, Australia and New Zealand," International Journal of Production Economics, Elsevier, vol. 135(1), pages 382-392.
    5. Bock, Stefan & Pütz, Markus, 2017. "Implementing Value Engineering based on a multidimensional quality-oriented control calculus within a Target Costing and Target Pricing approach," International Journal of Production Economics, Elsevier, vol. 183(PA), pages 146-158.
    6. Gonçalves, Tiago & Gaio, Cristina & Silva, Mariana, 2018. "Target costing and innovation-exploratory configurations: A comparison of fsQCA, multivariate regression, and variable cluster analysis," Journal of Business Research, Elsevier, vol. 89(C), pages 378-384.
    7. Stadtherr, Frank & Wouters, Marc, 2021. "Extending target costing to include targets for R&D costs and production investments for a modular product portfolio—A case study," International Journal of Production Economics, Elsevier, vol. 231(C).

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