Abstract

Today's fast changing business environment makes urgent necessity of product innovation and
strategic management awareness, keys to companies' competitiveness, long-term strategy
implementation and survival. Firms can no longer produce and market huge amounts of standard
products with a relatively stable market and technological climate. The business management has
to grapple with unstable, rapidly changing markets and technologies in order to run their
organizations and be able to sell products. To implement market driven management policies
across the organization, measurement and cost control systems must be designed to motivate the
desired consumer - oriented behavior. Thus strategies that determine the direction of product
innovation have become more crucial to corporate management today than ever before. In this
situation therefore, target - costing system (Japanese) has been identified as the system which
will help managers push forward this badly needed strategy. The increasing popularity of the
system as opposed to "cost plus" (Western), has influenced my study in this thesis. Therefore
contained herein is a study to examine whether Bangladeshi firms are adopting target costing as
their management practice. In the study, 20 companies are contacted and 16 indicate that they
use similar systems. Use of the system is high among manufacturers and cost reduction is among
their main motive for adopting the system. Cross functional application and design/product
conception departments are the leaders in driving the system.

In today’s intensely competitive and highly volatile business environment, consistent

development of low cost and high quality products meeting the functionality requirements is a
key to a company's survival. Companies continuously strive to reduce the costs while still
producing quality products to stay ahead in the competition. Many companies have turned to
target costing to achieve the objective. Target costing is a structured approach to determine the
cost at which a proposed product meeting the quality and functionality requirements must be
produced in order to generate the desired profits. It subtracts the desired profit margin from the
company's selling price to establish the manufacturing cost of the product.

Target costing is a widely used technique for cost management during product development.
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Despite target costing strategic intuitiveness, its operational during product development requires
careful decomposition of a product's constituent cost elements. The main objective of this thesis
is to describe an experience developing early-stage cost parameters for a specific product
development process effort for manufacturing company by proposing and applying a Target
Costing technique. One secondary objective is to provide a model to operational “Target Costing
technique " by breaking down cost targets into product parts, features and common elements,
focusing on creating parameters for cost control during product development.

Target costing is a strategic weapon that is being increasingly adopted by a number of leading
firms across the world. Despite a proven record of success, many managers often underestimate
the power of target costing as a serious competitive tool. When they read the word “costing,”
they naturally assume that it is a topic for their finance or accounting staff. They miss the fact
that target costing is really a systematic profit planning process. Rather than the inward
orientation of traditional cost methods, Target costing is externally focused taking its cue from
the market and customers. It is market-driven costing that develops new products that meet
customer price and quality requirements as opposed to cost-driven development of products that
are then pushed on to customers in the hope that they will buy the products.

This thesis explains the use of target costing as a strategic profit planning and cost management
tool. This will identify its key principles, contrast it with traditional cost management tools, show
the critical steps in the process, and demonstrate its functioning in practice.

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Part one: Thesis formulation

Chapter 1
Introductory Section

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1.1 Introduction and background material
The modern business atmosphere is characterized by the strengthening of global competition,
rapid pace of automation and computer technology, environmental and safety issues, short
product life cycle, consumers' need for high quality and innovative product at a reasonable price,
and so on'. A company's survival and growth in such a challenging environment depends among
other things on its capacity to produce and market indisputably innovative products that satisfy
both the levels of quality and price expected by its market niche".

In order to satisfy customers, a firm needs to maximize its efficiency throughout its entire value
chain. If efficiency is not maximized throughout the entire value chain, costs can rise above
those of rivals and it may be difficult to regain these higher costs through increase of p rice. It is
evident that cost management and management accounting has greatly evolved within this last
decade in response to the shift in the business environment. Approaches such as Activity-Based
Costing (ABC), Activity-Based Management (ABM), Total Quality Management (TQM), Target
Costing or Target Cost Management (TCM), life cycle costing, balanced scorecard, and other
new concepts have emerged to support the drive towards the need for strategic cost
management'.

Target Costing is often presented as one of the strategic cost management approaches better
suited to strengthen a company's competitiveness in meeting today's business challenges. Unlike
the conventional "cost-plus" approach, Target Costing is an "open system" which links external
and internal factors from the inception. The activities to optimize the key success factors (cost,
quality, innovation, and time) of a product are carried out mainly at the development and design
phases, involving a multi-functional team of a company's participating functions as well as other
members of the value-chain, mainly the suppliers".

Since Target Costing has begun to be adopted and implemented by business organizations
operating in other business environments than its original one, i.e. the Japanese environment, it
can be assumed that something new about the approach can be learned by exploring what is
happening in other business contexts. This study aims to investigate the core components of
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target costing, how its principles are being applied in firms and how it has developed in other
places such as Bangladesh. The interest here is also to assess how it might be regarded as a fad
due to this rapid expansion.

1.2 Background of the Report

Globalization or Free market economy is now world’s major challenge to every business
industry. Recent business world as well as Bangladesh faces highly economic recession, with
this situation the present economy of Bangladesh demands immediate development of business
technique, tools and proper decision making policy. This report has been prepared in the light of
emerging management accounting technique “Target Costing- in Bangladesh” as a part of the
fulfillment of thesis program required for the completion of the MBA program Major in
Accounting under the Faculty of Business Administration of Stamford University Bangladesh.

This thesis report is a mandatory requirement of my MBA program, and prepared by supervision
of thesis supervisor. The report was prepared under the supervision of Md. Mamunur Rashid,
Senior Lecturer, Faculty of Business Administration, Stamford University Bangladesh. The
thesis supervisor authorized me to submit the report of “Target Costing- in Bangladesh”.

1.3 Objective of the Study

With aim of completion the MBA program, the objective of this study is dividing in two
categories- General Objective & Specific Objective. The General objective of the report is to
express the gather knowledge by conducting study about Target Costing, also this management
accounting techniques functional activities & performance in various industries in Bangladesh.

The Specific objective of this thesis is: -

To understanding the meaning and importance of target costing. To understand how target
costing can be applied in an organization. To know how to manage the target costs. To know the
factors that influence target cost and its merits and drawbacks.

To investigate and assess how target costing can be used as an efficient cost management tool for
managers and as such be an effective planning strategy in this changing business world and
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Bangladesh, it has been observed that more than 80% of major manufacturing of world business
as well as of other levels of production have used target costing.

To diagnose the core concept of target costing and, attempt to provide some understanding that
might explain the degree of reliability of the system. Some of the shortcomings of the system
will be identified and how they can be overcome.

To investigate that Target costing is being used by various firms as a strategic cost management
method, if so, the intensity of its application and the prospect in Bangladesh.

1.4 Scope of the Study

Investigative study method is used in writing this report. This study method was significant for
me because before this study I have not enough understanding to proceed with such type of
research project also on this topic.

This study is characterized by flexibility and resourcefulness with respect to the methods, formal
research method employed by investigating various business industries in Bangladesh and
obtaining information by asking question to qualified personnel.

The study involves structured questionnaire, large sample and probability sampling plans. Under
the study once a new idea or insight is discovered, they may shift their exploration in that
direction. Observation method is used to complete this qualitative research.

Finally the purpose of this study is to determine whether target costing is used by the
Bangladeshi manufacturing companies and whether those companies using the technique apply
the principles of the target costing application process in their customer expectation, profit
margin, cost and price determination, cost reduction and management operations.
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1.5 Methodology of the Study
In order to make the Report more meaningful and presentable, two sources of data and
information have been used widely- Primary Data & Secondary Data. Both primary and
secondary data sources were used to generate the report.

Primary Data Sources Secondary Data Sources

o Conversation with the accounting professional o Published article and manuals on Target
o Observing various organizational procedures Costing
o Relevant field study as supervisor concerned o Periodicals published by ICAB & ICMAB

o Information through interviews with respective o Various books, articles, compilations etc.
personnel o From newspapers and internet

To successfully finish the project certain methodology has been followed to cover the
followings: -

o The Preparation of the Survey structure & Selection of the Sample

o The Data Gathering Technique

The Preparation of the Survey structure & Selection of the Sample size

The data used in the study consist of the information gathered via the survey applied to the
various department executives from the companies selected and the qualified personnel by the
simple casual method. In my study, the default sample size was 20. In the case of control and
random designs, I used 10 cases control for the user of TC & 10 for random, whose hypothesis
were then estimated.
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The Data Gathering Technique
Considering the relevant literature and study about the topic subject in the direction of the
purpose and scope of the study, the questionnaire form is formed in three sections.

The first section consists of personal information of the respondents such as names, titles and
positions.

The second section of the questionnaire consists of questions regarding general information
about the company such as industry; manufacturing method and the personnel questions aimed at
detection of the level of current applications in terms of the basic principles and applications of
target costing.

The third section is discussed in this study consists of questions related to the analysis of the
companies which use target costing or a similar application in Bangladesh, in terms of the
benefits those companies obtain and the factors affecting the success of target costing. SPSS-
11.5 (Statistical Package for Social Sciences) was used for the analysis of data obtained from the
questionnaire.

1.6 Limitation of the Study:-

On the way of my study, I have faced some problems that termed as the limitations of the study.
In all respect following limitation and weakness remain within which I failed to escape by any
means. These are follows:

Budgeted time limitation: - It was one of the main constraints that hindered to cover all aspects
of the study.

Confidentiality of data: - Because of some divisional and confidential problem, I could not get
enough information. Every organization has their own secrecy that is not revealed to others.
While collecting data some company personnel did not disclose enough information for the sake
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of confidentiality of the organization.

Data Insufficiency: - Especially there is a lack of information about the determination of the
companies applying target costing method and the level of target costing applications in these
companies. Sufficient books, publications, fact and figure are not available. These constrains
narrowed the scope of accurate analysis. If these limitations had not been there, the report would
have been more useful and attractive.

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 Part 2 Theoretical formulations.
Chapter 2
Understanding The Target costing Concept

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2.1 Review of Past Literature
The literature about target costing deals more with the concepts of target costing than with its
practical application. Literature describes the concept of target costing and various techniques
used in target costing.

The definitions of target costing are many, but they all focus on the same point of cost reduction.
However, definitions vary in the scope of cost reduction. Some definitions take the overall
product life cycle into consideration while some consider particular functions or just product
development, along with some important definitions of target costing are mentioned as follows:

“Target costing is a set of management methods and tools used to drive the cost and activity
goals in design and planning for new products, to supply a basis for control in the subsequent
operations phase, and to ensure that those products reach given life cycle profitability targets.”

Target costing has been defined in by listing all stages of product life cycle, while Cooper and
Slagmulder defined target costing in Target Costing and Value Engineering by placing emphasis
on the aspects of cost, quality and functionality as follows:

“Target costing is a structured approach to determine the life cycle cost at which a proposed
product with specified functionality and quality must be produced to generate the desired level of
profitability over its life cycle when sold at its anticipated selling price.”

Different aspects of target costing including those of interest to management are detailed in. The
following are the key messages sent by target costing according to:

1. Target costing takes place within the strategic planning and product development cycles of a
firm. Product design goes through this development cycle in a recursive, rather than in a
linear fashion.
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2. The first phase of target costing is the establishment phase. The focus here is on defining a
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product concept and setting allowable cost targets for a product or a family of products.
3. The second phase of target costing is the attainment phase. This phase transforms the
allowable target costs into achievable target costs.
4. The establishment and attainment phases of target costing occur at different points in the
product development cycle. Different organizational processes play primary and secondary
roles in these two phases.
5. Many other business processes support target costing, and the success of target costing
depends on these other processes being performed effectively within an organization.

The literature review of target costing shows us that the concept of target costing and the tools
used for its implementation are described in detail. Several companies where target costing is
used are mentioned, but specific details about product designing and cost reduction are not
available in literature review. The later chapter will explains target costing and discusses the
issues of implementation.

2.2 History of Target Costing

Target costing originated in Japan in the 1960s. As it did with quality, Japanese industry took a
simple American idea called value engineering and transformed it into a dynamic cost reduction
and profit-planning system. Value engineering originated at General Electric during World War
II. It was an organized engineering approach to determining how to produce products in the face
of parts' shortages. The practice instituted to design products that could do more with fewer
parts. Later it became an organized effort to examine how to provide the needed features or
functions in a product at the lowest possible cost. Japanese industry expanded the basic concepts
of value engineering into the target-costing process. Today more than 80 percent of all assembly
industries in Japan, such as automobiles, electronics, consumer appliances, and machine tools
and dyes, use target costing. Naturally, some of the best practitioners of target costing are leading
Japanese companies such as Toyota, Nissan, Sony, Nippon Denso, Daihatsu, Cannon, NEC,
Olympus, and many others.

In the United States, target costing has been used only since the late 1980s. The loss of market
share to Japanese companies, as in Chrysler's case, has been a major motivation for adopting
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target costing. Adoption of target costing in the United States remains slow for several reasons,
some managers fail to appreciate its strategic importance. Others mistake it for a narrow cost
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reduction technique and confuse the simplicity of its ideas for a simplistic process. Still others
country like Bangladesh use some elements of target costing but mistakenly think the have
adopted the entire process.

2.3 Definition of Target Costing

Target costing concept is very straightforward. It is based on the logic that a company should
manufacture the products that yield the desired profit. If the product is not yielding the desired
amount of profit, the design of the product should be changed to obtain the desired profit or the
product should be abandoned. A comprehensive definition of target costing as given in
mentioned below:

“The target costing process is a system of profit planning and cost management that is price led,
customer focused, design centered, and cross functional. Target costing initiates cost
management at the earliest stages of product development and apply it through out the product
life cycle by actively involving the entire value chain.”

To provide an exact definition of target costing is difficult because the Japanese companies
where the system had been greatly used as a cost strategy vary and each one has its own unique
approach to defining it.

Common to most definitions is a process founded on a competitive market environment whereby

market prices drive cost and investment decisions, cost planning, management and reduction
occurring early in the design and development process, and cross-functional team involvement.

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2.4 Target Costing Versus Traditional Cost Management
The traditional approach to profit planning is a cost plus approach. This approach estimates
production costs and then adds a profit margin in order to obtain a market price. Should the
market be unwilling to pay the price, the firm will then attempt to find cost reductions.
Alternatively, target costing commences with a market price and a planned profit margin for a
product and establishes an allowable cost for the product. Product and process design is used to
reduce product cost in order that it is equal to this allowable cost (Ansari et al 1997: 16). The
differences between the cost plus and target costing approaches are summarized in Table 2.1.

Table 2.1: Comparison of target costing and cost-plus approaches

Cost Plus Approach Target Costing Approach

Market considerations not part of cost Competitive market considerations

planning. drive cost planning.

Cost determines price. Prices determine costs.

Waste and inefficiency is the focus of

Design is key to cost reduction.
cost reduction.

Cost reduction is not customer driven. Customer input guides cost reduction.

Cost accountants are responsible for

Cross-functional teams manage costs
cost reduction.
Suppliers are involved after product is
Suppliers are involved early.
designed.
Minimizes initial price paid by Minimizes cost of ownership to
customer. customer.
Little or no involvement of value chain Involves the value chain in cost
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in cost planning. Planning.

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(Source: Ansari et al 1997: 16)

2.5 Intellectual Foundations of Target Costing
According to Ansari et al (1997: 16) a traditional cost plus approach is depicted as a "closed
systems" approach, while target costing represents an "open systems" approach. The
differences between these two approaches are summarized in Table 2.2 below.

Table 2.2: Intellectual foundations of cost management compared

Systems Traditional Cost Management Target Costing (Open Systems)

Theory (Closed Systems)
Concept
Relations with Interacts with external
external Ignores external environment; cost environment to responds to
environment system focuses on internal measures of customer needs and competitive
efficiency. threats.

Number of No consideration of cross functional or Consider many relationships

Variable extra-organizational impact of cost among function and accords the
Considers system value chain
Form of After the fact, based on cost incurred Before the fact, by anticipating
regulation and correction of error using and designing costs out of a
variance information. product before Production.
Purpose of Keeps cost to a pre-specified limit set Continuous improvement of cost
regulation or by standards or budgets. for both customers and producers
Control over a product life cycles.

(Source: Ansari et al 1997: 17)

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2.6 Principles of Target Costing
Swenson, Ansari, Bell and Kim (2003: 13) noted in their study that the best practice companies
were relatively consistent in the manner in which target costing was applied. In this respect, the
best practice companies employed a cross-functional organizational structure, listened to the
"voice of the customer," focused on cost reduction during the new product development stage,
and were effective at removing costs throughout the supply chain. They concluded that target
costing has been extremely effective in controlling costs and enhancing profit.
Ansari et al (1997: 11) describe target costing as a systematic process of cost management and
profit planning. The six key principles of target costing are:

2.6.1 Price-led costing

Target costs are calculated by subtracting the required profit margin from the competitive market
price, which is summarized in the following equation:

C= P−π

Where C = target cost

P = competitive market price
π = target profit
The situation in the marketplace controls price, while the financial requirements of a firm and its
industry determine the target profit. For example, if the competitive market price for a product is
R100, and a company requires a 15 percent profit margin to remain financially viable in its
industry, then the target cost for this product is R85 (R 100 - R 15).

Price led costing have the following sub principles:

 Product and profit plans are determined by market prices. These plans are analyzed
frequently to ensure that resources are only provided for products that generate consistent
and reliable profit margins.
 Active competitive intelligence and analysis drives the target costing process. Meeting or
pre-empting competitive threats relies on an understanding of market prices.
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2.6.2 Focus on customers
Since target costing is market driven, the views of customers are of utmost importance and
should therefore be taken into account throughout the entire process. Understanding the needs of
customers and what competitors are currently doing or might do to meet those needs is essential.
Quality, cost and time requirements of customers are thus incorporated in product and process
decisions and guide cost analysis. Engineering development activities are driven by a focus on
customers and are shaped by the demands of the market.
The attainment of a target cost is not achieved by sacrificing the features needed by customers ,
reducing the performance or reliability of a product, or by delaying the introduction of the
product in the market. Further enhancements to the product's features and functions only occur in
the following instances:

 Customer expectations are met.

 There is a willingness of customers to pay for them.
 Market share or sales volume is increased.

2.6.3 Focus on design

Target costing systems spend more time at the design stage, it eliminates costly and time
consuming changes needed later, resulting in time to market being effectively reduced. This is in
contrast to traditional cost reduction methods which focus on economies of scale, learning
curves, waste reduction, and yield improvement to manage costs. The implications of this design
orientation are encompassed in the following:
 Costs are managed by target costing systems before they are incurred rather than
afterward. The target costing process focuses on design since that is when the majority of
costs are committed, as illustrated in Figure 2.1. Cooper and Siagmuider (1999: 15) state
that some authorities estimate as much as 90% to 95% of a product's costs are fixed once
a product is designed i.e. the costs cannot be avoided without redesigning the product.
Ansari et al (1997: 13) further indicate that by looking at the impact of design on all
costs, from R&D to disposition, allows for cost reduction over the entire life cycle of a
product.
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  Engineers are challenged to focus on the cost impact of product, technology, and process
designs by the target costing process. Before being incorporated into the design all
engineering decisions are filtered through a relative customer value impact assessment.
 All participating functions of the firm are encouraged by the target costing system to
examine designs, in order to ensure that product or engineering changes are made prior to
the product entering into production. Few engineering changes are required by world-
class practitioners of target costing, after the commencement of production. However,
companies not using target costing typically make a significant number of design
changes after the start of production.
 Simultaneous engineering of products and processes are encouraged by target costing
systems as opposed to sequential engineering. This enables problems to be solved earlier
in the process thereby reducing development time and cost.

Boer and Ettlie (1999: 49) point out that the impact of design decisions may only reflect on the
financial statements two years after the decisions are made. One aspect of product design
complexity - can result in the following downstream costs which impact negatively on profits:

 Inventory levels increase as more parts are required.

 Quality is under pressure as complex parts are difficult to assemble.
 Additional time is required to train customers.
 Complex products break more frequently and are difficult to repair.
 Labor and rework costs increase.

2.6.4 Cross-functional involvement

Target costing uses cross-functional product and process teams representing design and
manufacturing engineering, production, sales and marketing, purchasing, cost accounting,
service and support. Outside participants, including suppliers, customers, dealers, distributors,
service providers, and recyclers are included in these cross-functional teams. The teams are
responsible for the entire product from initial concept through final production.
The remainder of the target costing process is the responsibility of marketing, production,
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product engineering, and other functional expert areas.

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2.6.5 Value-chain involvement
All members of the value chain, such as suppliers, dealers, distributors, and service providers,
are involved in the target costing process. Developing a co-operative relationship with all
members of the "extended enterprise" maximizes cost reduction efforts throughout the value
chain. Long-term and mutually beneficial relationships with suppliers and other members of the
value chain form the basis of a target costing system.
Target costing process where competitive pressure is transmitted by the firm at the top of the
supply chain to other firms within the chain and each firm in the supply chain acts in a manner
that benefits the others. For interactions to be interactive adversarial relationships needs to be
replaced by interdependent, cooperative relationships. This leads to supplier networks emerging
in which all firms in the network operate in a mutually supportive manner even though the firms
may be in direct competition with each other.
Swenson et al (2003: 14) concluded from his study that, in addition to internal operations, the
best practice companies rely on cost saving opportunities from its supply chain to meet cost
targets. Since approximately 75% of the value of the products manufactured at Daimler-Chrysler
and Continental Teves comprise of purchased raw materials and components, the participation of
their suppliers are critical in ensuring that target-costing goals are achieved. Their supply chains
are considered to be part of an "extended enterprise" where they share design information, cost
information, and inter-company teams meet to establish cost reduction goals.

2.6.6 A life-cycle orientation

Management accounting has traditionally focused on costs incurred after the product has been
designed and developed, i.e. when the product is in production. The result is that substantial
costs involved in the product design phase may not be taken into account in costing the product,
rather these costs may have been capitalized or treated as an expense in prior years. In addition,
the costs of discontinuance are rarely included as part of the product cost when the product is
discontinued. Life-cycle costing overcomes the above shortcomings by including all costs over
its entire life cycle, from inception to abandonment. This determines whether adequate profits
are being generated to cover all life-cycle costs.
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Life-cycle costs, which include the purchase price, operating costs, maintenance, and distribution
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costs are brought into account under target costs. The goal is to minimize the life cycle costs for
both the customer and the producer.
 The customer requires the minimization of product ownership costs, resulting from the
lowering of operating, using, repairing and disposing of the product costs.
 The producer requires the minimization of development, production, marketing,
distribution, support, service, and disposition costs.

2.7 The Target Costing Process

The target costing process differs from one firm to another and from one author to another.
Indicate different numbers of phases and sections for the target costing process. These variations
have no significance to the purpose of this research. In this study, the process proposed by
Cooper and Siagmuider (1997: 11), which is depicted in Figure 1.1, will be followed. The
process consists of the following three sections:
 Market-driven costing
 Product-level target costing
 Component-level target costing

Figure 1.1 Target Costing process

Market-driven costing is the first step in the process during which stage the allowable cost of
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each product is identified. The allowable cost is the cost at which a product must be
manufactured in order to earn its target profit margin at its expected target-selling price. Product-
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level target costing is the second step in the process during which stage the product-level target
cost is identified. This is the cost, which is set to be achievable on the basis that product
designers expend considerable effort and creativity. Component-level target costing is the final
step in which component-level costs are identified. It is expected that the firm's suppliers find
ways to deliver components at their target costs, while making adequate profit.

2.7.1 Market-driven costing

According to Cooper and Siagmuider (1997: 87) market-driven costing can be broken down into
five steps, which is illustrated in Figure 1.2 below.

Long–term
Sales and
Profit
objectives

Structured
profit Mix

Target selling Target selling Target selling

price price price

Target profit Target profit Target profit

margin margin margin

Allowable cost Allowable cost Allowable cost

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Figure 1.2: Market-driven costing

2.7.2 Product-level target costing
According to Cooper and Siagmuider (1997: 107) the second part of the target costing process
involves product designers finding ways of developing products that satisfy customers at the
allowable cost. As product designers may not always achieve this, the product-level target
costing process increases the product's allowable cost to a target cost that the company can
reasonably expect to achieve, considering its capabilities and suppliers. The product-level target
costing process is illustrated in Figure 1.3 below.

Applying Allowing for

Monitori the extenuating
Progress cardinal
circumstances
rule
Disciplining the

target costing process

Achieving the
target cost
Market-driven Setting -

costing product-level Value Quality Design for

target costs manufacture
engineering function and
(VE) deployment assembly
(DFMA)

Figure 1.3: Product-level target costing

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2.7.3 Component-level target costing

Target costs for a product's components are developed once the target cost for the product has
been established. Cooper and Siagmuider (1997: 139) identify four steps in component level
costing, which are illustrated in Figure 1.4.

Market-driven Product-level
costing target costing

Setting the Setting the Selecting

target costs of target costs of suppliers
major functions components

Rewarding
supplier
creativity

Figure 1.4 Component-level target costing

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2.8 Barriers To Adoption

The senior manager of finance for decision support initiatives at Boeing, Keith Hallin, is of the
opinion that there are three barriers to the adoption of target costing. Firstly, whilst there is an
abundance of information in Japanese literature, there is little English-language instruction.
Secondly there is a cultural barrier as "people tend to build fences around their responsibilities
because that's what they believe they are measured on." Thirdly there is an organizational barrier
as "employees are organized according to functions in most companies." Both the cultural and
organizational barriers do not lend themselves to the implementation of such a team-orientated
strategy (Ban ham 2000: 130).

 Lack of understanding
In a culture that has previously embraced a cost-plus approach to pricing, it is difficult to
implement target costing. This is due to the cost-plus approach often being quicker and does not
involve an iterative, inclusive approach to reducing the gap between current costs and target
costs. Whilst the term is seen to be restricted to that of the accounting domain, accountants have
not been involved in implementing production changes, despite having access to the cost data.

 Team and cross-functional barriers

Although the logic of target costing is easy to understand, the prevailing cost-plus approach
continues to be used by a number of industries. This is usually the result of a lack of
understanding of costs throughout the supply chain and the absence of tightly linked,
communicating supply chain partners.

 Irrelevance or fear of the effects

Many managers regard target costing as just another buzz word or accounting term with little
relevance to manufacturing or marketing. They fail to recognize that the concept of target
costing is identical to the lean concept implemented in manufacturing, since these terms are
attempting to achieve a similar goal of reducing non-value added, irrelevant activities that
fail to contribute to a product's value. Often the smaller partners with less power within the
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chain will feel that they are being tasked with too much of the cost reduction pressure during
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 the cost setting negotiations. Further employees may fear of losing their jobs and purposely
work against the target costing process.
 Production detail

The design process must be broken down into its lowest level components. This requires the
involvement of manufacturing, design engineering, product engineering and marketing.
Therefore, whilst the concept of target costing is simple and straight-forward, the execution
is extremely difficult. While Japanese companies have successfully applied target costing as
a strategic tool for nearly two decades, it is relatively new and generally not well applied.
The reasons for this are:

 Many companies mistake some elements of target costing systems, such as affordable
design criteria, design to cost, or design for manufacturability, for target costing. They
fail to appreciate the breadth of target costing as a process for integrating strategic
planning with profit and cost planning.
 Target costing is a relatively new and largely undocumented technique in the English-
language literature. The writing that exists fails to convey the strategic significance of
target costing as a competitive weapon for today's global marketplace.
 The basic ideas of target costing are so simple and so intuitive that there is a tendency to
underestimate their power or scope. Many companies often view target costing as another
cost estimation or reduction method like budgeting, regression analysis, or learning curve
applications.
 Target costing requires cross-functional teams to take ownership and responsibility for
costs. This key attribute typically is not part of today's engineering and marketing culture.
Most engineers and salespeople regard cost management to be a finance function.
Finance, for its part, must provide cost data that can support the type of analysis that
target cost systems require.
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2.9 Benefits Of Target Costing
The use of target costing to plan or project the costs of products before they are introduced , and
to ensure that low-margin products which generate insufficient returns are not introduced, as the
primary reason for the adoption of target costing. Other benefits identified include the following:

 Highlights other problems in areas such as purchasing.

 Improves the understanding of the costs of products and services, enabling issues to be
identified early in the process where action can be taken before costs are locked in.
 Focuses on the final users of the service or product.
 Is multidisciplinary and involves staff from all areas in the cost analysis, in which
responsibility for managing costs is encouraged.
 Provides a framework which focuses on the wider supply chain, in effect a whole
systems approach is encouraged.
 Analyses the impact that new services have on existing services in service organizations.
 Ensures satisfactory financial performance by developing specific and real targets.

This reason are point out that by focusing on the design stage, target costing eliminates costly
and time-consuming changes required later, effectively reducing the time to market. Also by
considering the full Lifecycle cost of the product, target costing minimizes total costs for both
the producer and the customer

2.10 Drawbacks Of Target Costing

Following are the drawback of target costing-

 Longer development times - an overemphasis on design results in a longer product

development cycle and a longer time to market.
 Employee burnout - pressure to attain demanding targets can result in employee burnout
and frustration.
 Market confusion - attending to customer requirements can cause additional features to
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be added on resulting in the rapid increase in product models, which may lead to market
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confusion.
  Organizational conflict - one department may feel that they are shouldering too much of
responsibility, which leads to internal conflict.
Davila and Wouters (2004: 15) further state that the advantages of target costing become
liabilities in high-technology industries, by pointing out the following potential limitations:

 Target costing focuses attention on cost drivers and away from revenue
drivers.
 Target costing is too time consuming.
 Target costing is too linear and bureaucratic.
 Target costing is too detailed.

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 Chapter 3
The Role of Target Costing in a Company

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3.1 Strategic Implications of Target Costing

A target cost is the allowable amount of cost that can be incurred on a product and still earn the
required profit from that product. It is market driven costing. This thesis shows how a target
costing process when well executed, can improve a firm's competitive position by improving
quality, reducing costs, and accelerating the time to market.

 Quality: - Target costing improves product quality by making it an explicit objective of the
product development and costing processes. Cost targets cannot be achieved by
compromising the features that a customer desires or by reducing the performance or
reliability of a product.

 Cost: - Reducing costs is at the heart of target costing. Unlike traditional methods, however,
target costing does not wait for production to start before managing costs. It makes cost
planning a part of profit planning and uses an intelligent, customer-focused design process to
manage costs before they incurred.

 Time: - Target costing reduces the time from concept to marketing of products because
products and processes are designed simultaneously. No time is lost in trying to determine
how to manufacture a product after it designed or in correcting design errors.

3.2 Need for Target Costing

What makes target costing so important today? The answer lies in the nature of the recent
industrial competitive environment. Today businesses face a global environment that has
following four characteristics: -

 Competitive: - Because prices cannot be increased in many key industries. Many new
producers, some with a lower cost of doing business, have entered the global market place.

 Rapidly changing: - Because the dissemination of technology and knowledge has

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accelerated considerably. This faster pace makes it difficult to use any one factor, such as
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quality, for a long-lasting competitive advantage.

 Unforgiving of mistakes or delays: - Since shorter product lives leave little time to respond
to changes in the marketplace or to recover from mistakes.

 Demanding: - Because sophisticated consumers have knowledge of many products and want
better quality products at an affordable price. It is difficult to sell inferior products with
reduced features at a lower price.

3.3 Target Costing Approach

As a totally new product and its industry develop, it starts to compete based on its new
technology, concept. Competitors emerge and the basis for competition evolves to other areas
such as cycle time, quality, or reliability. As an industry becomes mature, the basis of
competition typically moves to price. Profit margins shrink. Companies begin focusing on cost
reduction. However, the cost structure for existing products is largely locked in and cost
reduction activities have limited impact. As companies begins to realize that the majority of a
product's costs are committed based on decisions made during the development of a product, the
focus shifts to actions that can be taken during the product development phase.

The following ten steps are required to install a comprehensive target costing approach within an
organization.

1. Re-orient culture and attitudes: - The first and most challenging step is re-orient thinking
toward market-driven pricing and prioritized customer needs rather than just technical
requirements as a basis for product development. This is a fundamental change from the attitude
in most organizations where cost is the result of the design rather than the influencer of the
design and that pricing is derived from building up a estimate of the cost of manufacturing a
product.

2. Establish a market-driven target price: - A target price needs to be established based upon
market factors such as the company position in the market place (market share), business and
30

market penetration strategy, competition and competitive price response, targeted market niche
or price point, and elasticity of demand. If the company is responding to a request for
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proposal/quotation, the target price is based on analysis of the price to win considering customer
affordability and competitive analysis.

3. Determine the target cost: - Once the target price is established, a worksheet (see example
below) is used to calculate the target cost by subtracting the standard profit margin, warranty
reserves, and any uncontrollable corporate allocations. If a bid includes non-recurring
development costs, these are also subtracted. The target cost is allocated down to lower level
assemblies of subsystems in a manner consistent with the structure of teams or individual
designer responsibilities.

4. Balance target cost with requirements: - Before the target cost is finalized, it must be
considered in conjunction with product requirements. The greatest opportunity to control a
product's costs is through proper setting of requirements or specifications. This requires a careful
understanding of the voice of the customer, use of conjoint analysis to understand the value that
customers place on particular product capabilities, and use of techniques such as quality function
deployment to help make these tradeoffs among various product requirements including target
cost.

5. Establish a target costing process and a team-based organization: - A well-defined process

is required that integrates activities and tasks to support target costing. This process needs to be
based on early and proactive consideration of target costs and incorporate tools and
methodologies described subsequently. Further, a team-based organization is required that
integrates essential disciplines such as marketing, engineering, manufacturing, purchasing, and
finance. Responsibilities to support target costing need to be clearly defined.

6. Brainstorm and analyze alternatives: - The second most significant opportunity to achieve
cost reduction is through consideration of multiple concept and design alternatives for both the
product and its manufacturing and support processes at each stage of the development cycle.
These opportunities can be achieved when there is out-of-the-box or creative consideration of
alternatives coupled with structured analysis and decision-making methods.

7. Establish product cost models to support decision-making: - Product cost models and cost
tables provide the tools to evaluate the implications of concept and design alternatives. In the
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early stages of development, these models are based on parametric estimating or analogy
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techniques. Further on in the development cycle as the product and process become more
defined, these models are based on industrial engineering or bottom-up estimating techniques.
The models need to be comprehensive to address all of the proposed materials, fabrication
processes, and assembly process and need to be validated to insure reasonable accuracy. A target
cost worksheet can be used to capture the various elements of product cost, compare alternatives,
as well as track changing estimates against target cost over the development cycle.

8. Use tools to reduce costs: - Use of tools and methodologies related to design for
manufacturability and assembly, design for inspection and test, modularity and part
standardization, and value analysis or function analysis. These methodologies will consist of
guidelines, databases, training, procedures, and supporting analytic tools.

9. Reduce indirect cost application: - Since a significant portion of a product's costs (typically
30-50%) are indirect, these costs must also be addressed. The enterprise must examine these
costs, re-engineer indirect business processes, and minimize non-value-added costs. But in
addition to these steps, development personnel generally lack an understanding of the
relationship of these costs to the product and process design decisions that they make. Use of
activity-based costing and an understanding of the organization's cost drivers can provide a basis
for understanding how design decisions impact indirect costs and, as a result, allow their
avoidance.

10. Measure results and maintain management focus: - Current estimated costs need to be
tracked against target cost throughout development and the rate of closure monitored.
Management needs to focus attention of target cost achievement during design reviews and
phase-gate reviews to communicate the importance of target costing to the organization.

3.04 Target Costing Approach to Pricing:-

In traditional costing system it is presumed that a product has already been developed, has been
cost, and is ready to be marketed as soon as a price is set. In many cases, the sequence of events
is just the reverse. That is, the company already knows what price should be charged, and the
problem is to develop a product that can be marketed profitably at the desired price. Even in this
situation, where the normal sequence of events is reversed, cost is still a crucial factor. The
company can use an approach known target costing.
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In the target costing approach, the selling price is taken as a given and the company strives to
design and manufacture the product so that its cost is low enough to yield a satisfactory profit.
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Target costing is a market-driven approach that puts the emphasis on managing processes inside
the company, rather than hoping that consumers will accept a price high enough to cover all of
the costs the company has incurred. Following set of activities is the concept of target costing
technique:-

Determine Customer Wants and Price Sensitivity

↓
Planned Selling Price is Set
↓
Target Cost is Determined As: Selling Price Less Desired Profit
↓
Teams of Employees from Various Areas and Trusted Vendors Simultaneously
↓
Design Product Determine Manufacturing Determine Necessary Raw
Process Materials
↓
Costs are Considered Throughout this Process. The Process Requires Trade-offs to Meet
Target Costs
↓
Once Target Cost is Achieved the Manufacturing Begins and Product is Sold

Diagram 1: - Target Costing Approach

3.5 Factors Influencing Target Costing

Target costing is a very progressive cost management technique that can bring long-term benefits
to a firm if properly applied. However, it is not in every case that it can be applied. Hence target
costing, as the ultimate strategy, is worthy when applied in certain conditions. For this reason,
study shows that, it is best applied as follows:-
 Market driven costing
 Product level costing and
 Component level costing
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1. Market driven factors: This refers to costing strategy that is influenced by the market
forces. The most influential forces here are the power of competition and the nature of the
customer.
a) Power of competition: This determines the amount of attention the firm pays to the
competitive offerings of target costing and the volatility of the “survival triplet”. The survival
triplet is identified as the strategic boundary for the target-costing firm to operate. In such
conditions, where the manager understands the survival triplet well, the benefits of target costing
become realistic.

i. Nature of customer: The nature of the customer with such qualities as sophistication,
changes in requirements or taste and their degree of understanding their future product
requirement will influence the use of target costing. From research, it is believed that these
features will determine the benefits a firm will get from using target costing since they deal with
the width, rate of change of location and ease of predicting the location of survival zones.
Therefore, it is suggested that target costing become valuable where there is increased consumer
sophistication. Products must be designed to meet consumer requirement as closely as possible.

ii. Rate of change in customer requirements: The rate at which customer requirement changes,
is another factor influencing the use of target costing. This is because it affects the structure of
the survival zone as time passes and makes the zone change regularly. It is difficult to predict
how to launch a new product under such circumstances. This inability to determine the centre
point of the survival zone creates uncertainty and may warrant the use of target costing.
Therefore, it is hypothesized that target costing is more beneficial in environments where
consumer preferences change rapidly.

iii. Extent to which customers understand their future product requirements: How much
consumers understand of the future requirements of a product will determine the amount of
energy and whether to apply target-costing process or not. As the degree of understanding
increases, it becomes more beneficial to rely upon adopted customer preferences to determine
location of the survival point. Likewise, when consumers have less knowledge of their future
product requirements, firms paying much attention to customers’ risk, might launch products that
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fail because they are outside the survival zone. Therefore, it is easy for a firm to fail if the
product is launched with attributes that do not appeal to the customer. Target costing, therefore,
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is less beneficial in environments were there is difficulty in predicting the next location of the
survival zone and vice versa.

2. Product level target costing: This refers to structuring of cost management at the product
level and it is largely influenced by product strategy and the characteristics of the product. These
factors determine the current and historic future of the product.

a) Product strategy: Firms with product strategy that create lots of uncertainty, such as consumer
reaction to that product, will be more likely to use target costing in its production than otherwise.
Production characteristics therefore will include issues such as number of products in the line,
those that provide horizontal or vertical differentiation, the frequency of redesign and the degree
of innovation. Horizontal differentiated products are those sold at same price but deliver at
different bundles and functionalities. Vertical differentiation refers to how products differ by
degree of functionality and selling price. Products that are frequently redesigned are those where
producers aim to achieve advancements in technology and increase in functionality. Therefore,
the higher the rate of new product introduction, the greater the benefit derived from target
costing. Target costing has increased benefits in areas where the degree of innovation is
relatively low and decrease benefits where it is high. Where innovation is low, the target costing
system will rely more heavily upon historic information than in areas where the rate of
innovation is higher.

b) Characteristics of product: This aspect encompasses product complexity, magnitude of up-

front investment and duration of product development processes.

Product complexity relates to components that make up the product where, it captures a number
of distinct inputs. Some of the components may be difficult to obtain, as well as the technology
required to produce it. Target costing may become more important in such a situation because of
high product complexity than otherwise. This is due to the high degree of cost associated ranging
from the design to manufacturing stage.

In addition, it becomes difficult to manage the product design process and ensure that component
level cost adds up to product level target cost. Therefore, the more the complexity, the more the
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cost at component level and hence the need to target manage it. Research therefore postulates
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that target costing becomes more beneficial with increased product complexity.
Size of upfront investment influences target costing in that the magnitude of upfront will
influence the attitude of the firm towards target costing. This is because up-front investment will
determine the rate at which products will be launched. It may decrease if the firm wants to adjust
to risk. Consequently, firms that produce products that have high upfront investment will
develop a small range of product each carefully design to satisfy market needs.

Duration of product development refers to the time it will take for a new product to be
developed, as it will explain the benefits to be gained from the use of target costing. As the
duration of the design gets longer, the probability that the market condition that used to validate
this design might change is more possible. As the length of product review cycle increases
therefore, it becomes better to use target-costing methods since there is a very long tine between
design and launch.

3. Component level target costing: This portion of the factors influencing target costing deals
with the costs associated with components that make up the product. It is important to know the
cost of the components and cost charged by suppliers to project a long-term performance of the
whole product when launched into the market. Therefore, the strength of the suppliers is vital
here. Firms that rely on imported raw materials or sourcing of component production must guard
against the cost associated to such activity. Consequently, a very flexible supplier based strategy
is necessary. This is synonymous to the degree of horizontal integration, power over major
suppliers, and nature of suppliers’ relations.

a) Degree of horizontal integration: Lean production, which is strongly associated with target
costing, encourages large external supply of inputs such as raw materials and components. This
makes it imperative those targets cost producers have efficient relations with suppliers to ensure
a regular supply Therefore, lean producers or firms operating with horizontal integration will
reap benefits from target costing.

b) Power over major suppliers: - will determine how much energy will be used to determine
purchase price of components and hence influence the use of target costing. When buyer power
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is high, it is considered that much energy will be used to develop component level target cost. On
the other hand, where buyer’s power is low, the firms will use less energy to develop target cost
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for purchased components. Therefore, it is postulated that the more power the firm has over its
suppliers, the more benefit it can derive from target costing.

c) Nature of supplier relations: - also determines the use of target costing in that when firms
become more co-operative target costing also becomes more beneficial especially at the
component level. In the heart of this rich co-operation lies the potential of the firms to combine
design initiative and other means to collectively reduce cost. Co-operative relation between
suppliers and users will determine the use of Target costing.

3.06 Factors help in Achieving Target Costing: -

Target Costing has been described, as being a largely quantitative process, whereby there are
many tools and techniques that can be used in attaining it. Some examples of such techniques
and tools include:

 Conjoint Analysis, Quality Function Deployment, Market Analysis, Competitor Analysis,

Product Road mapping, Market-Feature Tables etc, helps to define the Product.

 Conjoint Analysis, Experience Curves, Price road mapping, Competitive Intelligence,

Reverse Engineering helps in setting the target.

 Value Engineering & Analysis, Component road mapping, Cost Analysis Tools, ABC
Practices, Simulation Tools, Supply-Chain Analysis achieve the Target.

 Cost-Reduction Methodology helps to maintain competitive cost.

It makes no sense to try to define each of these tools since they are numerous. I have just
mentioned and identified them to underscore the fact that they are the most used. The
fundamental mechanism various manufacturers use to achieve target cost, nevertheless, is value
engineering.
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 Value Engineering (VE):
Value Engineering is a mechanism manufacturers use to enhance the value of products and
services, which is measured by the relationship between the functions performed by products and
services, and the costs incurred. Different companies define the functions in different ways.
Some are geared toward process improvement while others are focused on satisfying the needs of
customers. The process of VE consists of describing the functions of each product, part, and
service, and quantifying the components of those functions. In the design phase, management
science techniques are employed on the various aspects of the operation to improve upon the
current method. Various manufacturer uses these as a tool to assist in attaining the objectives
behind target costing have therefore used VE.

 Lean manufacturing:
Lean production has characteristics such as elimination of waste and inefficiency, redevelopment
or R&D, customer satisfaction and their involvement in the process of designing, time
management, inventory control etc. Efficient implementation of lean production will lower cost
of production and make the firm competitive. Therefore, it becomes a potential enabler of target
costing.

 Evolution in Information technology (IT):

The expansion of information technology on its own typically fosters production systems and
boosts the coordination of the various production components and departments within the
company and with its collaborators. The Japanese were among the first in the world to invest
heavily in automated production systems and they are one of the most used IT in production in
the world. This must have been the reason for their success in designing the JIT system. Probably
this was due to the concurrent development of the target costing. IT has greatly influenced the
flexibility of the value chain and makes the market more opened and accessible and makes
producers able to position themselves as they find it easier to sample the market, check
competitors’ products and work directly with consumers. The use of the IT system therefore has
been considered a great facilitator to target costing.
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 Strategic Outsourcing:
One of the main futures of target costing is out sourcing. Here I introduce the concept of strategic
outsourcing, which refers to the tendency where some components of a product may be allowed
to be produced elsewhere. This maybe is due to cost factors, raw materials, or related factors.
Where transportation of raw material maybe expensive or tend to add unnecessary cost of
finished product, it might be cheaper to outsource that component of production other cheaper
locations e.g. to the source of raw material.

Conversely, other forms of outsourcing whereby management want to run away from purported
high cost are not likely to be a long-term benefit to those firms. Outsourcing which is not
typically strategic will not help in cutting cost, as most managers would want to convince stake /
shareholders.

 Supply chain management:

The term supply chain refers to the entire network of companies that work together to design,
produce, deliver, and service products. In the past, companies focused primarily on
manufacturing and quality improvements within their four walls; now their efforts extend beyond
those walls to encompass the entire supply chain. Effective supply chain management helps the
firm achieve the following:-

Appropriate inventory levels, and the ability to predict and react to shifts in demand, shortened
cycle times and faster delivery, real-time visibility into order and inventory status, pricing, and
availability of product and material automated alerts about order or shipment problems, rapid
response to market opportunities, increased free cash flow from increased effectiveness and
effective target costing.

 Kaizen philosophy:
Some researcher defines this concept separately from target costing. This is not correct because
the major viewpoint behind the Kaizen philosophy is the Japanese cost control system, which is
practiced outside the traditional cost accounting system. This is because Kaizen costing is set to
meet cost reduction various activities, which require changes in the way the company operates.
39

This is attained through continuous improvement, which is an integral part of target costing.
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3.7 Process to Establishing Target Costing
Target costs established within the parameters defined by a firm's product strategy and long-term
profit plans. These plans define new markets, customers, and products that a company plans to
pursue. Product concepts aimed at specific customers are tested for feasibility and then target
costs are set for feasible products. In establishing target costing, some major processes have been
identified as vital. The following Figure provides an overview of the establishment phase of
target costing:-

Figure 2: -The Establishment phase of Target Costing

It shows that there are seven major activities that must performed to establish target costs-

1. Market research: This helps provide information about customer needs or want that might
not be recognized during product conception. A market niche can be a best way to describe a
core market such as high computer users, or fashion inclined people etc.
Market research gains information about unmet needs and wants of customers. This research
defines the market and/or product niche that a company plans to exploit.
2. Competitive analysis: To understand the competitors and their products in the market and
how they evaluate the products. This might give the company a glimpse of how their
products might be received when launched.
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 Competitor analysis determines what competitors' products are currently available to our
target customers, how the customers evaluate these other products, and how our competitors
might react to our company's new product introductions.

3. Customer or market niche: To study and understand the market core areas and competitors
information so as to know how to attract them to buy a product. Factors may include their
ages, family type, sizes, and their incomes level etc.

A customer or product niche is defined by analyzing market and competitor information to

decide what particular customer segment to target. A customer niche is a more specifically
defined customer, such as young, professional, two income families.

4. Customer requirement: this relates to what specifically customers want in their product
specification. Initial product concept is set up to gather customers input to upgrade the
product to the most satisfied level.

Customer requirements are determined by introducing an initial product concept and asking
customers for their reactions. Preliminary designs are then refined, based on continued input
from customers, until the product meets their requirements.

5. Product features: are defined by setting specific requirements for the features the product
will have and the levels of performance of each feature.

6. Market price: this to establish a price that is acceptable to customers and one that is capable
of withstanding competition. This can be done in several ways as discussed latter in this
report. A market price is established that is acceptable to customers and capable of
withstanding competition. Market prices can be established in many different ways. Three
common methods are:
a) Existing price plus the market value of new features added. For example, if a new car
model has dual air bags, we might take the price of the previous model and add the value
of the air bags to determine the new price.
b) The projected market price that will provide a target market share.
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 c) Existing price plus the value of added physical attributes. This method is typically used
for products for which a customer's desired performance is captured by some physical
characteristic of the product.

7. Required profits: This refers to the target profit that the product will yield if sold at a
particular target price, usually expressed in returns on sales ratio (ROS). This ROS must take
into account the long-term profit plans and the return on assets (ROA) for the company.

The required profit target is set. A product must yield this profit. It typically expressed as a
return on sales (ROS) percent. This ROS percent depends upon the long-term profit plans
and the financial return on assets a company must earn in a given industry. Companies
typically ignore the return on assets since it is difficult to determine and complicates the
calculation of target profit.

3.8Attaining Target Costs

The second phase of target costing addresses how to attain the target cost that is, how to turn this
allowable cost into an achievable cost. There are three steps in attaining target costs: -
1. Compute cost gap,
2. Design costs out of a product, and
3. Release design for manufacturing and perform continuous improvement.
1. Computing the Cost Gap
Computing the difference between the allowable cost and the current cost is the first step in
attaining target costs. The current cost is the initial "as-is" estimate of the cost of producing
based on current cost factors or models. The overall gap between allowable and current must be
decomposed by life cycle and by value chain. Life cycle decomposition assigns total product cost
to the birth-to-death categories of research, manufacturing, distribution, service, general support,
and disposal.
2. Designing Costs Out
Reduction of cost through product design is the most critical step in attaining target costs.
The key to cost reduction is to ask one simple question: How does the design of this product
affect all costs associated with the product from its inception to its final disposal? To include all
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costs, not just manufacturing costs, may appear farfetched at first. However, many downstream
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costs such as distribution, selling, warehousing, service, support, and recycling can be greatly
impacted by product design.

Cost reduction relies on four major activities: product design, cost analysis, value engineering,
and cost estimation. Cost reduction is recursive since the activities cycle back several times as
the product goes from an initial concept to a final design. The recursion is a characteristic of
target costing. Recursion exists to generate a cost effective design, not to correct design errors.

3. Release Design and Undertake Continuous Improvement

The final stage in attaining target costs is to continue to make product and process improvements
that can reduce costs beyond that which is possible through design alone. It includes steps such
as eliminating waste, improving production yields and other such measures. It is after production
starts that actual costs can be compare against targets and instruction can apply to the next
invention of products developed.

3.9 Determination of Target Costing

3.9.1 Setting the Target cost
The main theme in the whole target costing practice is - what should be the new product cost. It
is not - what does it cost. Therefore, when the target sales price is established based on market
research, the desired profits is subtracted to yield the allowable cost. This allowable cost is the
management’s top dream and it is also very hard to attain, usually impossible in the short run.
This allowable cost is computed thus
Target sales price - target profits = allowable cost.
Or
Market driven selling price – desired profit = target cost.
The desired profit is set based on the company’s desired return on sales (ROS), rather than return
on investment (ROI). Researchers identify that using ROS is reasonable for technical and
strategic reasons.
The technical reason is that associated with the fast changing market of today where
manufacturers need a wide variety of products in low volume to survive. It is impossible to use
ROI to calculate the profitability of each of these products.
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For strategic reasons, ROS is a better option in that to implement long-term strategies
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manufacturers need to focus on the profitability of portfolios of related products and the role
played by each product in the product group. Through the ROS method, the allowable cost
compared to the estimated cost, which based on the current standard materials, labor and
overhead cost. Meanwhile serious studies are done on competitors’ products and position. Then
when all is assessed the gap between allowable costs and estimated cost is reviewed from various
perspectives. The target cost is then established as an attainable target, which will motivate all
personnel to achieve.

Target Costing at – AFBL:-

Suppose AFBL is planning to launch a new Energy drinks with advanced formula. The
company believes that such a product should sell for about taka 95 and total annual sales of
about 400,000 units. In order to design, develop, and produce this Energy drinks, an investment
of taka 10 million would be required. Due to the very short product lives of such products, the
company requires a return on investment (ROI) of 40%. If target-costing calculations revealed
cost reduction, AFBL’s current manufacturing cost must be:
Target Cost = Projected Sales Price – Desire Profit

Table 1: - Calculation of Target Costing

Particulars Factors Amount

Projected sales (400,000 drinks × 95 per drinks) 38,000,000
Less desired profit (40% × 10,000,000) 4,000,000
Target cost 400,000 Energy drinks 34,000,000
Target cost per drinks Per Energy drinks(34,000,000 ÷ 400,000) 85

3.9.2 Setting target price

The main idea behind target cost system is to minimize the cost of the ownership and not just the
price a customer pays at a time or purchase. Cost of ownership includes invoice cost plus
transportation, repairs and maintenance, services and support and disposal cost. The cost
associated with the cost of ownership must be considered at the time the initial purchase is set for
a product.
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Within this context therefore, unlike the old cost plus method, setting prices in a target-costing
regime takes into consideration the following:

a) Consumer need, want or taste. This may refer to the physical and related function of the
product that will influence the price.

b) Satisfactory price. This is the price consumers are willing to pay for a desired function and
feature.

c) Competitive position of competitors, their prices, range of products and product functionality.

d) Market share goal relating to the size of the market a company wants to attain.

a) Setting Target prices for new products:

Setting prices for new product is very difficult since the company does not yet have any historic
cost information to estimate market evolution. The most helpful strategy here is to do intensive
market research, studying competitors’ products, techniques etc, and to assess those factors that
will help the producer to evaluate the production cost to selling price and assess the expected
profit. However, setting prices when the product is going to the market for the second time might
be less challenging.

b) Setting prices for exiting products:

Setting allowable cost when the product has been in the market for some time is easier because
the producer can assess the performance of that product in the market in relation to that of the
competitors. Feedback on quality, functionality, new technology, new designs, environmental
changes etc, will help the producers to adjust and restructure the pricing system. The fact that
there is some historic information about the performance of the last product makes it easier to
draft a price plan. Ordinarily, current selling price would have been an adjustment to added
functions and feature of the product. This is known as function based adjustment.

 Functioned based adjustment:

Here adding or subtracting the value of the function added or taken off from an existing product
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sets prices. Prices of some products drop as technology improves e.g., computers, cameras,
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mobile phones, consumer electronics etc. It is argued that the computer companies for example
add new features at a planned target price reduction on the older model.

 Physical attribute based adjustments:

This relates to how prices are set influenced by the physical attributes attached to the product.
This raises the idea of weight, horsepower, and influence to the environment etc, in cars for
example. This can be very highly thought of in times when functionality is tied to these physical
attributes and where functionality changes very slowly. According to researchers, Caterpillar and
Komatsu present a very good example.

 Competitors based adjustments:

Here the firm sets price with an eye on the competitors’ prices and their product attributes. The
main strategy here is just to estimate the differentials value that market places on a competitor’s
products based on functionality and attributes.

 Few reasons why target costing is used for existing products:-

o To provide ongoing tracking of actual cost-versus-target cost
o To monitor actual-versus-planned price reductions from suppliers
o To achieve cost reduction in order to pass price reduction onto customers as a product/service
matures
o To encourage suppliers to remain competitive
o To measure supply management’s performance
o To meet or beat competitive pricing

3.9.3 Setting target profits

Marketing plays a crucial role in the determination of the target cost. The starting point for a
target cost is the estimated selling price for the product determined by market analysis. Sales
volume is also estimated and, from the total estimated sales revenue, the desired profit is
subtracted. Management determines this desired profit margin in reference to the company’s
long – term strategy. Retail prices and sales volumes are proposed by the marketing function
based on its research and the company desired market shares. Total sales revenue for each new
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product over its life can now be estimated. The target profit, usually determined by using return
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on sales, is subtracted from the total sales revenue. The target cost is now determined
3.10 Technical Properties of Target Costing

As a cost and profit management tool, target costing must possess two important technical
properties. It must lead to better decisions, and it must provide a good process understanding of
cost drivers and work flows in an organization. It performs well on both these criteria.

No 1:- Decision Relevance- The six fundamental ideas of target costing, discussed earlier in this
thesis, show how target costing brings together five critical management decisions. These are:
 How to increase profits and returns
 How to react to competition
 What prices to charge for products
 What features to provide and what specifications to use for those features
 When to introduce new products and stop building old products

Target costing integrates cost, quality, and time related issues into a single decision round
product design. Managers consider profits and competitive reaction as part of setting prices.
Costing is aimed at achieving target profits and returns. New products are timed by considering
lifetime profitability and technology cycles of new products.

No 2:- Process Understanding- Enhancing process understanding is at the heart of target

costing. Target-costing focuses on the product as it moves through time, across units, across
organizations, and across activities. All of this is accomplished by cross-functional teams who
have a product and process focus, not a responsibility unit or single organization focus. In fact,
target costing cannot function in an organization that is not ready to adopt a process orientation.

3.11 Behavioral Issues in Target Costing

There are two sets of behavioral issues in target costing. The first is the behaviors needed for
successful target costing. The other is the behavioral consequences of using target costing.
Behaviors Needed-
Target costing requires different behaviors from all members of an organization. In this thesis, I
focus only on the behavioral implications for management accountants. They need to change
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their behaviors in two ways:-

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 Management accountants must learn to get involved early and develop a tolerance for
ambiguity. Design is by nature an incomplete process. It is forward looking and requires
much estimation. Accountants always want verifiable data. They must shed this desire.

 Team playing is an important attribute for management accountants. They need to get
involved with other disciplines, understand the technical dimensions of the product, and
know what customers require. They must learn to talk to other team members from
marketing, engineering, and procurement, and explain to them the financial implications of
design decisions in an easy and understandable way. Effective communication is an essential
behavioral requirement for management accountants who participate in target costing.

3.12 Target Costing in the Budget Model

Target costing is the process of setting a target cost for a new product design, and requiring the
product design team to either meet the cost target or abandon the project if it cannot do so. The
accounting department’s sole involvement in this process is typically the inclusion of a cost
accountant on the design team who monitors the team’s ongoing progress in meeting its cost
goals.

The problem with this level of accounting involvement is that there is no linkage to the corporate
budgeting process, so there is likely to be a reduced level of budgeting accuracy for the cost of
goods sold. To improve the situation, require the participating cost accountants to forward status
reports to the budgeting staff for the current status of all product design projects for which target
costing is used. This has the following positive impacts on the budgeting process:

 The preliminary budget can be adjusted continually to reflect the go/no go status of each
design project. Thus, if the decision is made to eliminate a prospective product, its related
revenues and costs can be immediately removed from the budget model.

 The budgeted cost of goods sold for each product can be adjusted to match the estimated
final cost of each new product design.
To incorporate this target costing information into the budgeting process, the budget model must
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already itemize revenues and costs at the individual product level. However, if the current
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budget model only aggregates revenues and costs at the product line level, one can at least
incorporate into the model (in percentage terms) the general impact expected from a target
costing program.

3.13 Target Costing in Service Industries

Target costing is still an evolutionary process and it has not been fully institutionalized in most
service organizations. Some service firms use a modified approach to target costing, in which the
targets are not related directly to the target-selling price for a good or service.
For those organizations, target costing is currently more of a supply management tool than an
organizational process, although some of those firms seem to be working toward instituting
target costing as an organizational process.

 Barriers to implementing target costing in service organizations:-

Some barriers to implementing target costing in service organizations are that, in general,
purchase costs in the service sector are a much smaller percentage of total cost than they are in
the manufacturing sector. This may make the importance and potential contribution of target
costing less apparent to functions outside supply management.

In addition, it may be more difficult to tie the purchase price of an item directly to the target
price to customers in the service sector, because the impact of individual items is services that
will be sold to customers. Again, the demand for services are not easily determined as cannot be
projected. Unlike normal products, services do not have regular changes to functionality and
value added.

3.14 Target Costing to Improve Bottom-Line

 Changing Product Life and Requirement
Product life cycles are getting shorter and shorter, quite often one or two years, and sometimes to
less than one year in high-tech industries. Consumers are demanding new and diversified
products in short intervals. Due to factory automation, robots and computer-controlled
manufacturing systems are replacing the conventional production lines. What all these changes
mean is the traditional standard costing systems, which emphasize cost control in the
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manufacturing phase of the product life cycle, are no longer effective. With a one-year product
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life, controlling costs in the manufacturing phase simply doesn't accomplish much. Once the
product is developed and designed, there is a limit to how much cost cutting companies can do in
the manufacturing stage. Manufacturers have learned cost management should start up front at
the initial stage to be effective and measure up to their foreign counterparts.

A new cost management concept has been developed and practiced by world-class manufacturers
to deal with the needs in the product development and design phase.

 Control Costs Early

Target costing, although its concept is used throughout the product life cycle, is primarily used
and most effective in the product development and design stage. Born out of the market-driven
philosophy, target costing is based on the price down, cost-down strategy, which has allowed
companies like Sony and Toyota to win a considerable share of their respective markets.

In companies, costs of designing, producing, marketing, and delivering products dictate the mode
of competition. Accountants usually measure, based on allocation routines, the total cost of each
product. Most popular cost accounting methodologies, including the emerging activity-based
costing, focus on product profitability. No matter how effective the cost accounting methodology
may be, managers and accountants must heed the shareholders' needs for satisfactory short- term
profits, measured by ROI or ROE.

This focus on meeting the shareholders' short-term needs has been well documented, and easily
understood if we look at the Big Three automakers' practice of raising prices whenever there is a
restriction placed on Japanese imports. The practice is effective in achieving the desired ROI or
ROE, but it hurts the carmakers' ability to increase market share in sales volume. An increased
market share would give them a buffer in the future if they choose to sacrifice sales volume to
increase revenue and long-term profit.

In companies where target costing is used, there seems to be a different culture and attitude.
They place more emphasis on their relative position in the market and product leadership. Since
more than 80% of product cost is already determined by the time product design and processing
is complete, cost management must start (and done substantially) at the design stage.
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 Connect with Profit Planning
Target costing is very closely linked with the company's long-term profit and product planning
process. This link allows the company to focus on profit and product in an integrated strategy,
which does not discriminate against high-quality, high-price, high-margin products that require
high costs.

This is in direct contrast to a typical manufacturer’s practice, in which the question persists,
"How much does the product cost?" This question follows a new product design into the cost
accounting department, which estimates the new product costs based on the prices of purchased
materials and parts, labor costs, and other manufacturing overhead costs under the current
production standards. The marketing department then addresses the issue of whether they can
sell the new product. This departmentalized policy formulation of a typical company, which
focuses on cost, tends to discriminate against developing a new high-quality, high-price product.
Target costing derives its bases from the company-wide profit plan. The target profit for each
period is determined for each of the new and existing product portfolios. The profitability of each
group of related products is the focus, rather than the profitability of individual products. The
desired profit margins are traded between products in the same group, depending on what stage
the product is in its life cycle and what leadership role the product can play in acquiring a new
segment of the market.

 Setting the Target Costs

The main theme in the entire target costing practice is, "What should the new product cost?" It is
not, "What does it cost?" When the target sales price is established based on market research, the
desired profit is subtracted to yield the allowable cost. This allowable cost is top management's
dream. This is a target, which is very hard to attain, usually impossible in the short run.

The desired profit is determined based on the company's desired return on sales (ROS), rather
than ROI. There are two primary reasons for using ROS. The first is technical, the second is
strategic:

1. The Technical Reason. In the fast changing market of today, manufacturers need a variety of
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products in low volumes to survive. Calculating the profitability of each of those products in
ROI is well- nigh impossible.
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2. The Strategic Reason. In the implementation of long-term strategies, manufacturers need to
focus on the profitability of portfolios of related products and the role each product plays for
the product group. For this, ROS provides a better measure. The allowable cost is compared
to the estimated cost, which is based on the current standards of materials, labor, and
overhead. In the meantime, intensive studies of competitors' parts are done. After
motivational considerations have been made, the gap between allowable cost and estimated
cost is reviewed on various dimensions. The target cost is then established as an attainable
target which will motivate all personnel to achieve. Now, the struggle begins.

 Achieving the Target Costs

At this point, cost management people help engineering planners and designers decompose the
target cost into each cost element according to their relations to detailed production functions.
Production engineers determine standards for material and part usage, labor consumption, etc.,
which become the basic cost data for financial accounting purposes. These standards are also
used as a database for material requirements planning (MRP).

The struggle to achieve the target costs takes place in and outside the company. As soon as the
above-mentioned standards are established, purchasing people negotiate with outside suppliers as
to the prices of purchased materials and parts. Negotiations also take place among design,
engineering, marketing, and other departments in the company, and compromises are made in
their efforts to get within the target cost range.

The fundamental mechanism manufacturers use to achieve target cost, nevertheless, is value
engineering (VE).

 Value Engineering
The idea behind VE is very similar to activity analysis which was first developed and used by
General Electric. GE's activity analysis was not, however, and was not intended to be, linked to
corporate profit planning, target profit, and target costs as they are practiced In Japan.

VE is a mechanism Japanese manufacturers use to enhance the value of products and services,
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which is measured by the relationship between the functions performed by products and services
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and the costs incurred. The functions are defined by different companies in different ways. Some
are geared toward process improvement while others are focused on satisfying the needs of
customers.
The process of VE consists of describing the functions of each product, part, and service, and
quantifying the components of those functions. For example, a printed circuit board (PCB)
manufacturer's VE activities for the drilling operation include panel size, number of images per
panel, lot size and frequency, number of holes, hole size, stack height, laminate thickness, post
plate drill, and fine line class. In the design phase, management science techniques are employed
on the many aspects of the drilling operation to improve upon the current method.

 Post-Audit of Target Costing Performance

The short life cycles of manufactured goods in today's market require manufacturers to recover
investment in a short time. A short payback period is usually assumed in planning and evaluating
target costs. Post- audit of target costing performance is done on a regular basis to examine the
degree to which targets have been achieved. If targets have not been achieved, investigations
follow.

 The Real Weapon

The real power of target costing is that it allows companies to successfully motivate employees
and enforce cost management action plans. It is a disciplined approach to managing costs and
improving processes and products. Target costing, as briefly illustrated here, is also very
compatible with the emerging ABC, which can provide necessary cost information for
implementing target costing.

3.15 Suitable Industry for Target Costing Application

It can be said that whenever a management approach is developed, question arises as to which
firm such a system may fit appropriately. However, consistent with many new financial or
operational approaches, target costing may not be for everyone. Some companies, which seem to
benefit most from target costing, are those, which maintain the following criteria:

1. Assembly – oriented industries, as opposed to repetitive-process industries that produce

homogeneous products;
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2. Involved heavily with the diversification of the product lines;

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3. Use technologies of factory automation, including computer – aided design, flexible
manufacturing systems, office automation, and computer-aided manufacturing;

4. Have experienced shorter product life cycles where the payback for factory automation
typically must be achieved in a short time;

5. Must develop systems for reducing costs during the planning, design and development stages
of a product’s life cycle;

6. Are implementing management methods such as just-in-time, value engineering, and total
quality control.

3.16 Evaluation of Target Costing

3.16.1 Benefits derived from Target Costing
Successful planning and implementation of the effective target costing system helps to derive the
following benefits:

Target costing is future-oriented: - Some companies more often design the product, then
calculate the cost, and finally try to figure out whether it will sell. If the cost is too high, the
product goes back to the drawing board for redesign or if no additional time is available the
company launches the product and settles for a smaller profit.

The use of target costing ensures profitability on the short and long run: - Products that
show up as low-margin or unprofitable are quickly dropped. Similarly, ideas for new products
whose profitability projections fail to clear certain hurdle rates usually wither away on the
accountant’s spreadsheet. In the past, many leading companies, especially those that led by
technical differentiation, could release new products anticipating a future price increase. Explain
that competitive markets no longer allow a company time to introduce a product and then scale
up, because imitators bring me-too products to market so rapidly that first mover companies have
no time to establish brand loyalty, let alone recover their development costs.

Target costing reasons backward from customers’ needs and willingness to pay: -Target
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costing focuses the design team on the ultimate customer and on the real opportunities in the
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market. They call it “commitment to the customers”. If targets cannot be met, the company
cannot simply raise the price and launch the product. Admit that such discipline may be painful
to the people who work on a project, but it sends the important message that the customers come
first, and that if the company does not create value for them, a competitor will.

Target costing is used at the design stage, focusing on the cost implications of design
decisions. Designers must know how design affects such things as material consumption, yield,
machining methods, and line time. The intensity by which the product is designed to its target
cost is contrary to a situation where the projected cost can be exceeded without penalty. By
setting a target cost for a future product, all members of the design team consider the impact on
the cost while deciding on design alternatives. The use of a target costing system prevents design
engineers saying: “If we just add this feature, the product will be so much better and only cost a
little more.”

Target costing gives a clear, quantitative cost objective to design engineers: - Target costing
is totally different from the traditional approach or the cost-plus approach. Under the traditional
approach the new product’s expected profit margin, not the cost level of the future product
becomes the dependent variable when launching a new product. Under this traditional approach,
the profit margin is determined by subtracting its estimated cost from its anticipated sales price
(sales price - cost = profit margin). Under the cost-plus approach, the product’s expected sales
price becomes the dependent variable. This means that the sales price is determined by adding
the desired profit margin to the expected cost of the product (cost + profit margin = sales price).
Under both approaches, product designers have no specified cost objective to achieve. Instead,
they are expected to minimize the cost of the product as they design it.

The use of a target costing system forces management to set the NPD goals early in the
NPD process: - Setting target costs requires that management decides on the quality of the
future product as well as on the time-to-market, based on market research and the company’s
strategy. Setting NPD goals requires making trade-offs between the different characteristics of a
future product. Marketing people are traditionally oriented to sell products and want as much
features as possible for a new product, but do not want customers to pay for it. Under target
costing, management needs to balance cost and features against the customer’s ability (or
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willingness) to pay for all this.

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3.16.2 Disadvantage of target costing

Nevertheless, some authors also suggest that the use of target costing during NPD can lead to
some undesirable consequences.

First, it takes time and money to bring sweeping changes into an organization. There's also the
problem of changing workers' behavior. Why rock the boat if things are going well? The answer,
target costing proponents say, is simple: In the long run company will be better positioned to
compete in the marketplace with target costing than without target costing.

Second, target costing can be severely criticized because of excessive demands it puts on
subcontractors. As major customers pass their cost-reduction demands down to suppliers, the
suppliers push their suppliers and employees to do more, some of whom are already doing all
they can handle. It can be called the battle of intense negotiation between the company and its
outside suppliers. This excessive demand goes hand in hand with a restricted autonomy of the
suppliers.

Third, the use of target costing information might cause organizational conflicts. One aspect
involves the difficulty to decompose the total target cost to target costs of individual
components. It can be called as the battle among the departments, since most of the time
different departments are responsible to design parts or subassemblies. Deciding on the
component-level target cost means deciding on the effort the different departments will need to
do in reducing costs. Organizational conflicts might also arise when design engineers feel that
other parts of the organization are getting a free ride while they try to squeeze every penny out of
a product.

Finally, some researchers conclude that the extreme customer focus of target costing might lead
to market confusion, with too many products, too many options. Constant attention to customers’
desires causes extreme market segmentation. As a result the large number of different products
confuses customers. In general, most researchers extensively report on the benefits, while the
drawbacks are discussed to a less extent.
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3.17 Target Costing as Problem Solving Tools

The long-term financial success of any business depends on whether its prices exceed its costs
by enough to finance growth, provide for reinvestment and yields a satisfactory return to its
stakeholders. As competition increases, and supply exceeds demand, market forces influence
prices more significantly. To achieve a sufficient margin over its costs, a company must manage
those costs relative to the prices the market allows or, the price the company sets to achieve
within certain market penetration objectives. In this context, the practice of target costing has
evolved and would stand as a force to support this argument. The problems raised here in this
thesis are:

 The difficulty for modern company management to develop strategies that catches up with
modern business trends. Instead, they blame their failure to attain expected goals on other
non-related issues such as high cost of production or political policies such as high taxation.
The inability to apply efficient Cost management therefore remains the major source of all
business problems. Market sizes of firms have shrunk due to widespread technological
advancement and, again, nobody can boast of exclusivity in technology today as before. If
low cost environments can be technologically efficient, and can supply cost efficient
products for the market, the company’s management has to consider more rigorous costing
systems able to work in this competitive environment. Like Target costing, a tool to keep a
tab on long-term planning and production projection.

 During periods of market depression, managers tend to conclude that the cost of production
is unbearable. They may make rash decisions such as moving production to other locations,
which they deem are cheaper or they tend to cut cost through excessive layoffs. Firms can
lay off workers when they cannot be paid but some analyst see migration as a very short term
solution because soon those countries will start regulating their own markets higher taxes. To
take a stand on that, I have distinguished between two types of outsourcing- strategic and
non-strategic outsourcing. Some researchers propose that target costing when understood and
well implemented can provide an alternative solution to the above problem.

 Cost management systems, as a company’s strategic force ordinarily, should be designed to

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support a company’s operations and strategy. Traditional cost systems provide information
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that is distorted, too exaggerated, and too late to be used in reducing cost or providing
 productivity and market projection. Management accounting systems in general and cost
management in particular has to be re- examined and made in such a way that the risk of
understanding projections are minimized so that long term production and product planning
within this period of uncertainty can be projected with some amount of certainty, such as
Target costing approach.

 With globalization and increasingly easy means of communication there has been effortless
flow of information enabling markets to become easy to access from distant areas.
Consumers can compare quality, durability and prices of a product from one market with
those of other markets. South Asian countries as well as European countries are becoming
technology holders effecting prices and therefore becoming price leaders as a result.

Therefore, conventional notion whereby the owner of technology or core competence would be
considered a market leader and price giver is not longer fashionable. For an organization to
succeed consequently, and effect cost, structured systems have to be designed whereby expected
profits can be assessed from what consumers are ready to pay and what quality they want . To
attain this strategy target costing can be a viable solution as most of those mechanisms are
contained in its principles.

3.18 Reasons for Using Target Costing Technique

The target costing approach was developed in recognition of two important characteristics of
markets and costs.

The first is that many companies have less control over price than they would like to think. The
market really determines prices and a company that attempts to ignore this does so at its peril.
Therefore, the anticipated market price is taken as a given in target costing.

The second observation is that most of the cost of a product is determined in the design stage.
Once a product has been designed and has gone into production, not much can be done to
significantly reduce its cost. Most of the opportunities to reduce cost come from designing the
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product so that it is simple to make, uses inexpensive parts, and is robust and reliable. If the
company has little control over market price and little control over cost once the product has
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gone into production, then it follows that the major opportunities for affecting profit come in the
design stage where valuable features that customers are willing to pay for can be added and
where most of the costs are really determined. So it is where the effort is concentrated in
designing and developing the product. The difference between target costing and other
approaches to product development is profound. Instead of designing the product and then
finding out how much it costs, the target cost is set first and then the product is designed so that
the target cost is attained.

3.19 Some Myths about Target Costing

Target costing has now been around long enough and gained sufficiently wide acceptance that it
can no longer be called an emerging management technique. Yet there remains a certain amount
of ambivalence and confusion about target costing. Some companies have experimented with
target costing only to abandon it after encountering resistance from managers to the change from
traditional cost management systems. Others have moved in the direction of target costing, but
have failed to make the necessary strategic commitment to the idea to reap its full benefits. The
following discussion addresses some of the myths about target costing:-

The first myth is that target costing is primarily about setting cost targets. Target costing is
not just the act of setting cost targets—it is an entire value chain approach to managing an
enterprise. A value chain approach is totally different. Target costing begins with understanding
what the market values are—what the customer or prospective customer wants and is willing to
pay. It is especially important to keep these customer value expectations at the front of the
workforce’s awareness throughout the whole product development cycle and to take a very
disciplined approach to deciding where to position a new product or modification

Target costing involves translating customer value expectations into an acceptable product price
and taking away the profit that shareholders expect to make to get the target cost. Once a product
target cost is determined, decomposing the cost into the parts of the product can be difficult, and
it has to be done based on the features that a product provides to the market place and/or the
functions it performs. Customers don’t care how many engineers were on the project or how
much tooling cost was incurred, they care only about the cost of the various product features and
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functions.
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Another myth is that cost targets are just cost budgets. Target costing is totally different from
traditional budgeting systems, especially those in contract environments where managers have
been taught for years that budgets are something you spend. It is difficult to change the
workforce mindset from cost budget (which represents something to be spent) to cost target
(which represents something to be achieved). Cost budgets and cost targets are, fundamentally,
conflicting concepts that don’t belong in the same universe. Ideally, the word “budget” should be
banned in a target costing environment because it carries too much baggage from the old model.

A final myth about target costing involves where it fits in the developmental life cycle of a
product. Design-to-cost systems were tried at Boeing and other companies years before the
introduction of target costing, but many of these applications failed miserably because they
focused on far too small a part of the product life cycle. They mistakenly assumed that everyone
else in the value chain was going to engage in the system and that all of the financial information
was readily available so that people could do value engineering and value analysis studies. In a
lot of cases the value chain was simply not ready to accept the new model. To be successful,
target costing, like value engineering, must be embraced across the entire product life cycle,
from the very early concept development and market research all the way down to disposal of the
product.
Although not limited to target costing, there is also a common misconception within the broader
framework of corporate financial systems regarding the idea of “cost management.” In most
present day financial systems, there are organizations that are in charge of cost management, but
what they really do is report cost, not manage it.

3.20 Suggestions for successful implementation of target costing:

To have a successful target costing application, one must begin by determining the product’s
strategic market position and customer expectations regarding product features and functions.
Cost targets must not be viewed by managers as spending allowances or unrealistic spending
limits, but rather as goals to be achieved through collaboration with colleagues and other parties
up and down the value chain. Above all, target costing must be viewed not as a costing method,
but as a model for managing across the entire value chain. If this is done well, the final product
will meet customers’ expectations and both costs and profits will be within acceptable
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boundaries.
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3.21 Suggestion for recovery MIS and Accounting Limitations

Information systems are evolving, but too slowly, from a traditional view of internal cost
accounting measuring cost centers in predetermined accounting periods. They must move faster
to a market-driven system starting with the customer. The study found target costing systems and
the quick reporting of information facilitated learning, the study focus that under a high level of
advanced manufacturing technology, a target costing system must be introduced and information
should be provided frequently and quickly. 4009170

This information or organizational learning support system is a requirement for improvement and
encompasses accounting information, planning, control, production, and meeting budgets,
forecasts, and performance standards. Thus the information is a facilitator of corporate learning.
The new information must be adjusted to satisfy diverse information needs of managers and
include non-financial measures as well.

A company should know the costs of its own operations and should share part of the cost
information with cooperating firms in an open information network. Few firms know the full
costs of each product and stress the ability to cost new activities depends on mutually accepted
accounting practices among the suppliers in the supply chain. Target costing has gained
prominence within business organizations, the traditional management accounting practices of
standard costing and contribution margin analysis continues to predominate.

The professional bodies need to organize a management accounting curriculum to cover such
topics as target costing, along with activity based costing, and some others approach of
examining both quantitative and qualitative costs in a systematic, activity-oriented approach well
executed in various Bangladesh industries for increase the rapid growth. This curriculum change
is needed to meet the changing marketing place which is more global and is experiencing
deregulation and advances in information technology along with a customer focus and constant
change.
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 Chapter 4
Company Overview

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4.1Cement & Ceramics Industry

4.1.1 Fresh Cement Ltd.
Fresh cement ltd. is a company’s of Meghna Group of Industries (MGI) was born and is being
led by the hands of a visionary leader whose aspirations bring forth the best in people to come
together and become social innovators and change agents of the country. In 1976, Mr. Mostafa
Kamal started his journey with a small trading initiative for few essential consumer goods in
Moulvi Bazaar, the heart of wholesale trading in Dhaka. He set up his first factory in 1989 in the
industrial park at Meghnaghat, Sonargaon in Narayangonj district. Through the years, Meghna
Group has added several companies and today has 23 industries which includes units of various
assortments offering a full portfolio FMCG to heavy industrial products. Presently, MGI
employs about 10,500 people. Besides creating jobs for thousands, it is creating opportunities for
millions.

Mission

We thrive to build an enterprise to -

 deliver superior values to the stakeholders;

 accelerate industrialization for a better future of the country and
 empower millions of people to shape up their destinies.

Vision

Our vision is to -

 foster a strong trust between consumers, employees and stakeholders;

 stand the test of public scrutiny;
 achieve highest possible standards in day-to-day work and
 ensure what comes from the people goes back to the people many times over.

4.1.2 M.I. Cement Ltd.

Crown cement is a brand of M.I cement .The foundation stone of the M.I. Cement Factory Ltd.
was laid on December 11, 1998. Primarily the daily production capacity of the factory was 600
metric tons as it follows the world famous O-Sepa separator of Japan. M.I. Cement Factory went
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into operation commercially in 2000 and marketed its products with the brand name of Crown
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Cement. From the very beginning, it has maintained a non-compromising position on its high
quality. As a result, it has gained huge popularity in the market. Due to increase of demand,
company set up its second unit with the capacity of 800 metric tons per day and three unit with
the capacity of 1400 MT per day within two years.

Our Vision
Our vision is to make a contribution to the nation by creating opportunities in the arena of
industrial growth and development of Bangladesh, and to provide a solid foundation for society's
future.

Our Mission
As a modern cement company, we manufacture cement (Brand Name: Crown Cement) to meet
the needs of clients through innovative products & services that create value for all our
stakeholders.

4.1.3 Shinepukur Ceramics

Shinepukur Ceramics has been registered in Bangladesh in 1997 and the Plants were
commissioned in 1998. Commercial production of Porcelain Tableware started in April 1999 and
Bone China in November 1999. SCL is located in the BEXIMCO Industrial Park, near Dhaka
Export Processing Zone (DEPZ), 40 Km from Capital Dhaka City , where captive power
generation, water supply, effluent waste water treatment and all other infrastructural facilities are
available. Total Investment in the Company is in excess of US$ 35 Million. The Company has
already made additional Investment of US$ 10 Million to expand its Bone China Unit. For the
upper echelons of the Global Tabletop industry, Shinepukur produces World Class Bone China,
using the top quality raw-materials and ingredients, sourced by highly reputed Manufactures
from all corners of the Globe. These are meticulously crafted and transformed into exquisite
Bone China tabletop, mirroring a unique blend of eye catching shapes, enviable translucency,
durability, all of it with a Lead and Cadmium free glaze. These are augmented by a highly
calibrated test protocol for Metal release, Thermal shock tolerance, Detergent, Acid and
Chipping resistance, Verification levels, Dishwasher efficacy, all conducted by specialists at the
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SCL's most modern in-house Lab. The Main business is to produce ceramics products mainly for
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the household.
4.1.4 RAK Ceramics
RAK Ceramics is the largest ceramics manufacturer with annual global production output of
117million sq.m. of tiles, 4.5 million pieces of bath ware and 15 million pieces of tableware
accounting for around USD 1 billion global sales annually. The Ras Al Khaimah-based public-
listed company was established in 1991 by H.H. Sheikh Saud Bin Saqr Al Qasimi, Ruler of Ras
Al Khaimah and UAE’s Supreme Council Member who had the vision of making the company
into world-class organisation and H.H. Sheikh Mohammed Bin Saqr Al Qasimi, Crown Prince of
Ras Al Khaimah and the Chairman of RAK Ceramics has been directing the company towards
global competitiveness.

Vision

To maintain status as world’s leading innovator in ceramic field.

Mission Statement

Our Responsible And Knowledge-driven mission includes:

C- Close to our clients by listening to their needs and adapting to market requirements
E- Excellence in producing high quality products that offer best value-for-money
R- Redefining the product innovation and design process
A- Accountable to its clients, trade partners, stakeholders and employees
M- Motive employees to develop them into future entrepreneurs
I- Integrity of the management towards the organizational goals
C- Committed to the society by contributing towards a healthy environment
S- Sustainability in every sphere of business

4.2 FMCG
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4.2.1 Square Consumers Products limited

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Square Consumer Products Limited has started its journey in 2001 as a member of Square
Group, the leading corporate house in Bangladesh. Within a short span of time, it has been able
to create a strong foothold in the market through its quality products and customer services. For
its obsession with quality management, the company had obtained the international quality
standard ISO 9001 in 2005. Strong commitment to quality, adoption of advanced technology,
stress on human resource development, focus on continuous improvement and introduction of
new products for the growing markets has given the company a decisive position in the industry.
Recently the company achieved ISO 22000 for its food safety management system.

Square Consumer Products Limited has introduced three popular brands in the market namely
Radhuni, Ruchi and Chashi. Radhuni is the flagship brand of the company. Just after its
introduction, Radhuni drew the attention of housewives who demanded convenience and time
saving cooking. The product range of Radhuni is enriched with basic spices, mixed spices,
cereals & pulses based products, edible oil and dairy. On the other hand, Ruchi is providing
ready-to-eat snacks like Chanachur, Fried Dal, Banana Chips, Jhuribhaja, Peanut, Chutney,
Pickles and Honey. Ruchi has won the heart of the youngsters for its healthy, tasty & innovative.
The new brand of the company, Chashi is the landmark of those products which are collected
directly from the farmers having the indigenous essence and freshness.

The company assures to meet the increasing demand for quality products both at home and
abroad. The products with international standards are being exported to more than 22 countries.
Dedication to quality, innovative products, customer service and reasonable price has given the
company a unique position in the food market.

Mission Statement
We want to be the world-class food products manufacturer in Bangladesh by ensuring intrinsic
quality products and customer services with state-of-the-art technology and motivated
employees.

Objectives
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 To continue to provide the very best of what the consumer wants

To explore new segments of market and to cater to it

To continue to assure intrinsic quality of hygienic food products

To enhance consumers' standard of food habit

To ensure that the products are available at consumers' doorsteps

To enhance the strength and skill of the organization that will contribute to company's
increasing growth both in domestic and global markets.

4.2.2 ACI Consumer Products Limited

ACI Consumer Brands was initiated in 1995 with two major brands of the company – ACI
Aerosol and Savlon. These are two of most prestigious products which are enjoying the
leadership position in the market. The division started to take new businesses through off shore
trading as well as local manufacturing. In this process ACI Consumer Brands launched many
new products and also bonded with Joint Venture business relationships with ‘Dabur India’ and
‘Tetley UK’ and attained international alliances with world renowned companies.

The Consumer Brands Division boasts in having an unequivocal presence in consumers' heart
with the market leading brands like ACI Aerosol, Savlon, ACI Mosquito Coil & ACI Pure
Spices and Flour. With close to 80% market share in own categories, ACI Aerosol and Savlon
are the persistent performers in keeping the household clean and free from germs and harmful
insects. The ACI mosquito coil has also emerged as a formidable opponent to both the mosquito
and the competition, by providing effective and affordable solution to the conscious people of
Bangladesh.
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Our Mission
ACI’s mission is to enrich the quality of life of people through responsible application of
knowledge, skills and technology. ACI is committed to the pursuit of excellence through world-
class products, innovative processes and empowered employees to provide the highest level of
satisfaction to its customers.

4.2.3 Reckit Benkiser Bangladesh

For such a fast-paced, entrepreneurial business some are surprised to learn the company’s history
spans 150 years of innovation for consumers across the world. With a German and British
heritage, RB’s drive for financial performance and social responsibility today can be seen in its
deep roots .

RB announces new strategy for continued outperformance, along with a new vision and purpose.
Our vision is a world where people are healthier and live better. Our purpose is to make a
difference by giving people innovative solutions for healthier lives and happier homes.

Our vision and purpose

Our vision is a world where people are healthier and live better.Our purpose is to make a
difference by giving people innovative solutions for healthier lives and happier homes.

Our values

Achievement
Achievement makes us who we are. We don’t just aim high, we aim to outperform. We
recognize our people in this. We support them to outperform wherever they focus, be it products,
profits or Corporate Responsibility.

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4.3 Textiles Industry
4.3.1 Square Textiles Limited
Square steps into the textile sector with establishment of its first unit - Square Textiles Ltd. in
1997. A year later, Square step on to its second unit. In the same premises, Square established its
third unit on 2000.

Year of Establishment
Unit 1 : 1994 ; Unit 2 : 1998 ; Unit 3 : 2000

Manufacturing Business
100% Cotton Ring Spun Yarn for Hosiery

Target Market
Export Oriented Readymade Garments Industry.

4.3.2 Bex-tex Limited

Bextex Ltd. (the "Company") was incorporated in Bangladesh as a Public Limited Company
with limited liability on 8 March 1994 and commenced commercial operation in 1995 and also
went into the public issue of shares and debentures in the same year. The shares of the Company
are listed in the Dhaka and Chittagong Stock Exchanges of Bangladesh.

Bextex Ltd. is the most modern composite mill in the region. Bextex Ltd. has an installed
capacity of 288 high-speed air-jet looms in its weaving section and a high-tech dyeing and
finishing section with a capacity of 100,000 yards of finished fabric per day. This company is
located at Beximco industrial park.

Bextex Ltd. also has cotton and polyester blended yarn-spinning mill, with 122,000 spindles is
one of the largest spinning mills of the country. The mill was set up to feed the country's export
oriented industries.

Bextex Ltd. produces specialized finishes of denim cloth for export in finished as well as cloth
only form.
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Our Mission:

BEXTEX Ltd. is a full service vendor with strong vertically integrated production facilities as
well as creative & analytical capabilities which clearly sets us apart from most other South Asian
vendors.

Our Vision:

• Gain market leadership in high value added apparel in USA & Europe.

• Use “Innovation” & “Speed” as prime drivers, rather than cotton & cheap labor .

• Dominate these markets in high quality:

 Men's, Women's , Children

 Shirts ( Dress & Casual )
 Blouses ( formal & casual ) , Skirts, Jackets
 Jeans & Casual non - denim bottoms
 Knitted tops & bottoms

4.3.3 Viyella textiles Ltd.

Viyella tex Ltd was incorporated in Bangladesh with limited liability on 8 1998 and commenced
commercial operation in 1999 and also went into the public issue of shares and debentures in the
same year. The shares of the Company are listed in the Dhaka and Chittagong Stock Exchanges
of Bangladesh.
They produce 100% export quality RMG product to export in different country of Europe.
The target market is export oriented RMG sector.

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4.4 Pharmaceuticals Industry
4.4.1 Square Pharmaceuticals Ltd.

Chronology since Inception

1958 : Debut of SQUARE Pharma as a Partnership Firm.

1964 : Converted into a Private Limited Company.

1974 : Technical Collaboration with Janssen Pharmaceuticals, Belgium, a subsidiary of Johnson

and Johnson International, USA.

1982 : Licensing Agreement signed with F. Hoffman-La Roche & Co Ltd., Switzerland.

1985 : Achieved market-leadership in the pharmaceutical market of Bangladesh among all

national and multinational companies.

1987 : Pioneer in pharmaceutical export from Bangladesh.

1991 : Converted into a Public Limited Company

1994 : Initial Public Offering of shares of SQUARE Pharmaceuticals Ltd.

1995 : Chemical Division of SQUARE Pharmaceuticals Ltd. starts production of Active

Pharmaceutical Ingredients (API).

1997 : Won the National Export trophy for exporting pharmaceuticals.

1998 : Agro-chemicals & Veterinary Products division of SQUARE Pharmaceuticals starts its
operation.

2001 : US FDA/UK MCA standard new pharmaceutical factory goes into operation built under
the supervision of Bovis Lend Lease, UK.
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2004 : SQUARE enlisted as UNICEF's global supplier.

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2005 : New State-of-the-Art SQUARE Cephalosporins Ltd. goes into operation; built under the
supervision of TELSTAR S.A. of Spain as per US FDA/ UK MHRA requirements.

2007 : SQUARE Pharmaceuticals Ltd., Dhaka Unit gets the UK MHRA approval.

2009 : Starts manufacturing of insulin maintaining quality standards of US FDA & UK MHRA.
Dedicated hormone & steroid products manufacturing facility complying with the current Good
Manufacturing Practice (cGMP) of WHO, US FDA & UK MHRA starts operation.

2012 : SQUARE Pharmaceuticals Ltd., Dhaka Unit and SQUARE Cephalosporins Ltd. get the
Therapeutic Goods Administration(TGA) of Australia approval.

Mission
Our Mission is to produce and provide quality & innovative healthcare relief for people,
maintain stringently ethical standard in business operation also ensuring benefit to the
shareholders, stakeholders and the society at large.

Vision

We view business as a means to the material and social wellbeing of the investors, employees
and the society at large, leading to accretion of wealth through financial and moral gains as a part
of the process of the human civilization.

4.4.2 Beximco Pharmaceuticals Ltd.

Beximco Pharmaceuticals Ltd (BPL) is a leading manufacturer of pharmaceutical formulations
and Active Pharmaceutical Ingredients (APIs) in Bangladesh. The company is the largest
exporter of pharmaceuticals in the country and its state-of-the-art manufacturing facilities are
certified by global regulatory bodies of Australia, European Union, Gulf nations, Brazil, among
others. The company is consistently building upon its portfolio and currently producing more
than 400 products in different dosage forms covering broader therapeutic categories which
include antibiotics, antihypertensives, antidiabetics, anti asthma inhalers etc, among many others.
With decades of contract manufacturing experience with global MNCs, skilled manpower and
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proven formulation capabilities, the company has been building a visible and growing presence
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across the continents offering high quality generics at the most affordable cost.
Ensuring access to quality medicines is the powerful aspiration that motivates more than 2,500
employees of the organization, and each of them is guided by the same moral and social
responsibilities the company values most.

4.4.3 Incepta Pharmaceuticals Ltd.

Incepta Pharmaceuticals Ltd. is a leading pharmaceutical company in Bangladesh established in
the year 1999. The company has a very big manufacturing facility located at Savar, 35 kilometer
away from the center of the capital city Dhaka. The company produces various types of dosage
forms which include tablets, capsules, oral liquids, ampoules, dry powder vials, powder for
suspension, nasal sprays, eye drops, creams, ointments, lotions, gels, prefilled syringes, liquid
filled hard gelatin capsules, lyophilized injections, human vaccine etc. Since its inception,
Incepta has been launching new and innovative products in order to fulfill unmet demand of the
medical community. The focus has been to bring more new technologically advanced molecules
to this country.

The company specializes in value added high technology dosage forms like sustained release
tablets, quick mouth dissolving tablets, effervescent tablets, barrier coated delayed release
tablets, prefilled syringe products, Insulin and Insulin analogue and biological products, among
others . It has established a modern research and development laboratory for the development of
new, advanced dosage forms for various drugs and devices like poorly soluble drugs, dry powder
inhalers, coated pellets, modified release products, taste masked preparation etc.

Incepta has a very competent sales team, which promotes the specialties throughout the country.
The company virtually covers every single corner of the rural as well as urban area of
Bangladesh. It has its own large distribution network having 18 depots all over the country. The
company has a clear vision to become a leading research based dosage form manufacturing
company with global presence within a short period of time. With this view in mind the company
started to expand its business in overseas markets. Currently Incepta exports to 40 different
countries around the world. With hundreds of brands registered in different countries, and many
73

more in the pipeline, Incepta is gradually expanding its global footprint across all the continents.
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Vision

We want to become a research based global pharmaceutical company in addition to being a

highly efficient generic manufacturer. To discover and develop innovative, value-added products
that improves the quality of life of people around the world. And contribute towards the growth
of our Nation.

Mission

Provide people globally with high quality health care products at affordable prices in order to
improve access to medicine and to provide employees an enabling environment that facilitates
realization of their full potential.

4.4.4 Renata Limited

Type of Company: Listed Public Limited (Dhaka Stock Exchange)

Main Business: Manufacture and Marketing of Human Pharmaceuticals and Animal

Therapeutics. We have two production sites. The Mirpur Site is 12 Acres and Rajendrapur Site is
19 Acres.

History: The Company started its operations as Pfizer (Bangladesh) Limited in 1972. For the
next two decades it continued as a highly successful subsidiary of Pfizer Corporation. However,
by the late 1990s the focus of Pfizer had shifted from formulations to research. In accordance
with this transformation, Pfizer divested its interests in many countries, including Bangladesh.
Specifically, in 1993 Pfizer transferred the ownership of its Bangladesh operations to local
shareholders, and the name of the company was changed to Renata Limited.

In a gesture of corporate charity, Pfizer donated shares so that, along with a partial payment from
the SAJIDA Foundation, 51% ownership of Renata Limited would be held by the Foundation.
Today SAJIDA’s microfinance and micro-insurance programs support over 107,120 members
and their families; thus far cumulative loan disbursement totals BDT 5,750 million. Currently,
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SAJIDA’s health program covers over 1 million beneficiaries by delivering services.

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4.4.5 Glaxosmithkline Bangladesh Limited

GlaxosSmithKline PLC (GSK) is a global company of pharmaceutical, biologics, vaccines and

consumer healthcare company headquartered in London, United Kingdom. It started its operation
in Bangladesh before the liberation as Glaxo Laboratories. In 1973, it started its business as
Glaxo Bangladesh Limited in independent Bangladesh. In 2002 following the global mega
merger with SmithKlineBeecham identity changed to GlaxoSmithKline Bangladesh Limited.
(GlaxoSmithKline Bangladesh Limited, n.d.).

Main Business: The main business is to produces Medicine and mainly concentrated to Vaccine.

4.5 Foods and Beverages Industry

4.5.1 AFBL

AFBL is an sister concern of Akij Group. History of Akij Group stretches back to later part of
the forties. In its infancy, the Group started in humble way with jute trading which was known as
the golden fiber of the country, earning highest amount of foreign exchange.

Akij Group's ceaseless efforts with dynamic management and support from our numerous clients
have led our Group in diversifying its business activities. In the second phase, the Group went
into manufacturing handmade cigarettes popularly known as bidis. This sector gave a real boost
to the revenue earning of the Group as well as making a substantial contribution to government
exchequer. With the passage of time, the Group undertook new ventures and presently there are
15 units of industries under its umbrella like cigarettes, handmade cigarettes, printing &
packaging, textiles, hand board, pharmaceutical, leather processing and real-estate business are
in operation, catering jobs for more that 32,000 people in various categories.

The Group has plans for setting up more projects. The projects are already in pipeline. Foreign
investors have shown keen interest in joining with us for joint ventures. The matter is under our
active consideration and will hopefully soon mature. This will also help the nation's economy
growth and will create job opportunities to various professionals.
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Akij Group is also involved in socio-cultural activities. The Group has been operating a sizeable
orphanage free of charge in district town. The Group has also acquired a modern mother &
children hospital previously owned by Save the Children (UK). The hospital is being operated as
a non-profitable concern by Ad-Din Welfare Trust.

Akij Food & Beverage Ltd. has been established at a beautiful site Krishnapura, Dhamrai of
Dhaka. It has come with the best food & beverage in Bangladesh.

There are various types of drink. Mojo is the brand name of cola, Lemu is the brand name of
Lemon and Speed is the brand name of energy drink. Immediately after the introduction of the
brand it became very popular among its consumer because of the high quality and intensive
distribution in every nook and corner of the country.

Checky Monkey is the brand name of banana chips produced from this factory. It also is
becoming popular chips in Bangladesh.

Most of our Raw materials come from various foreign countries. The quality is very strictly
controlled. At every stage, non standard products are rejected.

4.5.2 Fu-Wang Foods Limited

Fu-wang Foods incorporated on 17 February 1997. Listed in Dhaka Stock Exchange : July 2000.
Listed in Chittagong Stock Exchange: July 2000. Started its commercial Production on August
1997. ISO Certification : ISO-9002 Certified on 04 November 1998 Business line.
Main Business: Food & Beverage Processing Industry Authorized Capital of tk.500 Million
Paid-up Capital: TK. 184 Million Number of Employees: 1764

It is our great pleasure to introduce FU-WANG Group. Since our beginning, always we have
been trying to maintain the best standard quality of our products. We produce a comprehensive
range of Foods, Beverage & Ceramic Tiles with high quality & standard. We constantly
innovate by frequently introducing new foods and beverage creations. Our ceramics tiles are
designed to give luxurious and comfortable glance. Our mission continuously innovates to
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increase customer satisfaction by offering high quality taste and standard products.
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4.5.3 Romania Foods & Beverages Limited

The Company started in 2004 with the acquisition of Rahmania Biscuit & Bread Factory Ltd.
Today Romania is the most valued and quality biscuit brand with three fully automated hybrid
oven lines in the production fleet. Our product range includes 20 varieties of biscuits including
brisk and various snacks including vermicelli and egg noodles.
Quality and innovation is one of the Romania's greatest strength supported by a highly qualified
team of professionals. Our quality process starts with the inspection of incoming raw materials
and packing materials. We source only the finest quality food ingredients supplied by the
renowned companies accredited with ISO 9000. We're constantly adding new products to our
diversified mix for our customers to exceed their quality expectations.

4.6 Leather Industry

4.6.1 Jass Leather Industries Ltd.
Jas Leather industry started its journey on may1995 in Hazaribagh, Dhaka with a small
production and procurement facilities of leather. Now this company has 10 factory for processing
and export the quality leather in different countries.

Main Business: Manufacture and Marketing of Leather in Bangladesh along with different
foreign countries.

4.6.2 Limex International Ltd.

The Company started in 2004 with the acquisition of Zaman Leather Factory Ltd. Today Limex
is the most valued and quality leather brand with three fully automated machines in the
production fleet. Our product range includes 20 varieties of leather product.

Main Business: Manufacture leather product by processing raw leather and export in different
countries.
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 Part Three Analyzing

Chapter 5
Analysis of Target Costing in Bangladesh

78

5.1 Data Processing

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 The number of personnel and the manufacturing methods of the participating companies and the
distribution of the respondents of the questionnaire in terms of position were assessed-
Percentage Respond With Question Under the Sample Cases Total
Survey Included Excluded
N Percen N Percent Percent
t
Participant business industries 6 100.0% 0 0% 100.0%
Participant business Companies 20 100.0% 0 0% 100.0%
Participant business engaged period 20 100.0% 0 0% 100.0%
Participant company face competition 20 100.0% 0 0% 100.0%
Participant rate intensity of competition 20 100.0% 0 0% 100.0%
Origin of the Competitor 20 100.0% 0 0% 100.0%
Participant company position under Competition 20 100.0% 0 0% 100.0%
Factors important to positioning product in the market 20 100.0% 0 0% 100.0%
Company used technique for Product Costing 20 100.0% 0 0% 100.0%
Satisfactory level with current technique 20 100.0% 0 0% 100.0%
Chance to improve growth with developed M. 20 100.0% 0 0% 100.0%
Accounting technique
Does the company follow described Target Costing for 20 100.0% 0 0% 100.0%
product development
How long used the target costing technique 7 35% 12 65.0% 100.0%
Assess for using Target Costing 7 35% 12 65.0% 100.0%
Reason for not using Target Costing 13 65.0% 7 35.0% 100.0%
Company might want to stay with Target Costing 20 100.0% 0 0% 100.0%
Company goal to used Target Costing for achieve 7 35% 12 65.0% 100.0%
Benefit derived for using Target Costing 7 35% 12 65.0% 100.0%
Which department executed Target costing technique 7 35% 12 65.0% 100.0%
Implementing pattern of Target Costing 7 35% 12 65.0% 100.0%
Evaluation of Target Costing to various company 7 35% 12 65.0% 100.0%

Table2:- Case processing summary

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 Here, the application level and form of target costing among the participating companies and
the distribution level in terms of industries are given. In Appendix-I, shows the 20
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 companies, which were the top companies in Bangladesh & the responses with the survey.
The 20 respondents the question asked in order to determine which types of business they
run:-

Chart:-1
Participants Business Industry

4.5

3.5

2.5

1.5 Series1

0.5

0
ics CG es ag
e
ica
l er
m til ar th
ra FM Te
x v em Le
a
ce e Ch
t & &B &
en od als
m Fo tic
Ce eu
ac
m
har
P

 Here, the question asked to the 20 respondent’s to determine whether they face any types of
80

risk in business. They mention that they face risk from home as maximum, also for abroad &
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E- market. The rate of the intensity of competition:-

 Table 3: - Participant rate intensity of competition they face

Response Frequency Percent Valid Cumulative

Percent Percent
Moderate 4 20.0 20.0 20.0
High 9 45.0 45.0 65.0
Very High 7 35.0 35.0 100.0
Total 20 100.0 100.0

Chart 2
Participant rate intensity of competition they face

10
9
8
7
6
5
Series1
4
3
2
1
0
Moderate High Very High

 Here, the question asked to the respondent’s to determine which factor is important to take
position in the market for their business product. Majority of them reply that sales price is
81

main factor, then cost of product & quality.

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 Table 4:- Factors important to positioning product in the market

Topics Frequency Percent Valid Cumulativ

Percent e Percent
Sales Price 11 55.0 55.0 55.0
Cost of Product 9 45.0 45.0 100.0
Total 20 100.0 100.0

Chart 3
Factors important to positioning product in the market

100
90
80
70
60
50 Sales Price
Cost of Product
40
30
20
10
0
1 2 3 4

 The question was asked to the respondent’s to determine which technique they use for
producing their business product. Majority of them engage in food & allied response that
they use full & process costing, thirty percent of them engage in textile business use target
82

costing. Others reply that they use technique similar with target costing but differently
termed, some mention that they use other technique.
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 Table 5:- Company used technique for Product Costing

Costing Frequenc Percent Valid Cumulative

y Percent Percent
Process Costing 5 25.0 25.0 25.0
Target Costing 7 35.0 35.0 60.0
Throughput Costing 3 15.0 15.0 75.0
Full Costing 5 25.0 25.0 100.0
Total 20 100.0 100.0

Chart: - 4

Company Used Technique for

Product Costing

Process Costing
Target Costing
Throughput Costing
Full Costing

 The question was asked to the respondent’s, to express the level of satisfaction with their
current technique, user of target costing technique replied that they are satisfied but over the
percentage is very much poor.
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Chart 5
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 Satisfactory Level With Current
Technique

Satisfactory
Good
Very Good
Poor

 The question was asked to the respondent’s, why they didn’t use target costing technique for
producing their business product. Majority of them replied that the technique is unknown to
them and others replied that this is costly & excessive them to collect information.
Chart: - 6

Reason for not using target costing

Unknown
Complex
Expensive to collect
Costly

 The question was asked to the respondent’s, to assess the operation target costing, majority
(thirty eight percent) user of target costing technique replied that this is very efficient , other
replied as efficient & manageable.
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Chart: - 7
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 Assess for using target costing
3

2.5

2 Assess for using target

costing
1.5

0.5

0
Manageable Efficient Very efficient

 The question was asked to the respondent’s, why they use target costing. Majority of them
replied that they use the technique to developing new product, some portion respond that
they use for cost budgeting & others purposes.
Chart: - 8

Company Used Purpose Of Target

Costing

New Product Development

Budgeting Cost
Making Profit

 The question was asked to the respondent’s to determine what benefits they got for use the
technique. They replied that they able to reduce the production of cost & control the quality
for producing their business product. Others replied that they got higher margin for used the
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technique.
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 Chart: - 9

Benefit Derived for Using Target Cost-

ing

Cost Reduction
Quality Control
Higher Margin

 The question was asked to the respondent’s, to define that how they executed the operation of
target costing in their organization, majority user of target costing technique replied that they
implement this technique through accounting department, other replied as engineering expert
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& departmental team, workforce.

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 Chart: - 10

Implementing Patterns of Target costing

3.5

2.5

2 Implementing Patterns of
Target costing

1.5

0.5

0
Dept. Work- Int.Disc. Accounting Through
force Teams Dept. Expert

 Finally the question was asked to the respondent’s, to evaluate & express the experience
of using target costing in their business. Most of the user of target costing technique
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replied that this technique is excellent, others rates is very good & above average. No
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negative experience or comment was found against the target costing.

 Chart: - 11

Evaluation of Target Costing

Excelent
Very Good
Above Average

 Non adopters:
These are those who indicated that they use other methods than target costing. They were also
questioned as to why they did not use the system. Their response was also run on the 7 -point
linker scale and the analysis below is a reflection of their response. There were 15 in total from
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all those who replied The graph below provides a summary of why they don't use target costing.
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The reasons for' not adopting
The graph above shows why non-adopters do not adopt target costing or similar practices
and the various industries they represent. The main reasons for not adopting target costing as
shown above are:

 Complexity of the system:

Complexity here refers to the difficulties in understanding all the components that are
combined to comprehend and assist in the implementation of target costing. Three major
non-adopter industries indicated that they did not apply the system because the system
was very complex.
 System is expensive:
This refers to the amount of resources involved in implementing target costing systems
in the company. This cost of implementation is perceived very high than the expected
returns. Therefore, it is seen as a less value creating activity for the firm. Two of them;
machine and transport equipment and chemicals and pharmaceuticals indicated that they
do not adopt the system because it is too expensive. They thought that cost management
could be achieved through other more efficient and cheaper means.

 Too much pressure on workers:

Too much pressure here is attributed to the fact that for targets to be achieved, worker
would be expected to work at longer hours and at faster pace so as to reach targets.
Therefore, some machine and transport equipment company non adopters felt that the
system put lots of pressure on workers. "We have a lot of pressure from trade union
organizations and the like ... which makes it difficult to meet the requirement on any extra
labor cost ... At normal working hours workers complain of pressure and if we are to
implement such a system .... we cannot meet demands" said an agricultural equipment
manufacturer.

 System not known:

In which target costing system is not known to them and is perceived strange when it was
presented it to them. The food industries contacted indicated that they do not know about it.
This may tie to reality because the some Bangladeshi agricultural firms or food producing
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companies have been performing very well and there are signs that the sector might grow.
"There is high competition but we still do good business using our traditional methods" said
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a food producer. However, there are some firms in the sector which been have accused of
dumping in some foreign markets (Aria), others have been sold out to foreign firms (Findus)
and some are being merged so as to gain access to foreign markets Other firms felt that the
system was not relevant to their operations. "The nature of our operations doesn't require us
to go into such systems" said the marketing manager of a chemical producer. They may also
maintain such a stance because of limited pressure from the economies of their firms. Even
though they claim that they have strong competition, they are still able to operate profitably
at their current management systems.

From the questionnaires answered and open questions as well as telephone interviews, I did not
however, come across a situation where target costing would have been considered a fad. This
was probably due to the small size of the population sampled. Thus if a larger study would be
conducted, such a situation where some firms may call it a fad may be encountered. At the
moment either firms do not apply the system due to its complexity, cost associated with its
structures or the stress it puts on workers or that they do not know about its existence by "name"
or that the contacted companies' structures do not warrant such a system.

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 Chapter 6
Findings, Recommendation & Conclusion

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6.1 Findings
After the analysis and review the role of target costing in various industries the following
findings are observed during the study:-

 From The 20 companies (sample), only 7 companies (35% of the total sample) are using the
target costing techniques as a cost management tools.
 Majority of the respondent about to 60% users of target costing mention that they use this
technique for development of new product, and Where 30% respondent mention that they
use for cost budgeting and 10% for other purpose.
 The main benefit of using target costing is cost reduction responded by the 65% of total
users, 25% users use this techniques for get higher margin and the rest 10% mentioned that
they use it for quality control.
 The highest portion of the user of target costing company mentioned that they executed this
technique with the help of accounting department. By accounting department 43%, through
expert 30% and rest of by the departmental Workforce.
 About 65% users mentioned that Target Costing is an excellent method, 25% mentioned that
it is Very good method and only 10% mentioned that it is above average.
 Lacking of using the wrong or inefficient technique, almost fifty percent of the respondent
business under the survey faced high risk for the competition in their business at home &
abroad, they are poorly satisfied with their current management accounting technique.
 Whether the users who use Target costing are highly satisfied & they express that this is very
much efficient, & they strongly agreed that they will stay with target costing.
 Almost all the respondent company under the survey agreed with that a developed
management accounting technique helps in achieve business growth.
 Some respondent company uses the similar process of target costing in their own manner but
this is not much efficient as target costing.
 Majority percent of respondent who don’t use target costing mention that they are unknown
about the developed technique, others mention that it is costly & take excessive time.
 Majority of the respondent who use target costing mention that they use this technique for
development of new product, and other respondent mention that they use for cost budgeting.
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6.2 Recommendation
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To enhance the management accounting technique such as target costing practices and to gain
competitiveness of the Bangladeshi companies the following recommendations have been made
after analyzing all major and associated findings. The key results of this evaluation study
regarding the application level of target costing in various Bangladeshi industries can be show as
follows:

 A higher percentage of firms in all sectors use cost plus principle for product costing but this
costing is not useful for product costing. So it is suggested to use target costing for product
costing.

 The companies applying target costing or having a similar process have narrow market
analysis and marketing information systems. They follow balanced competition strategies
 They must give more importance to determine the customer expectations before the product
design, in order to fully provide the expected benefit from target costing
 Their pricing of the new products by depending on cost usually poses an obstacle to the
successful application of target costing
 Rather than textile industries, over the fifty percent other industries such as food, cement etc
use full costing for product costing, but this costing technique is not appropriate for product
costing. So it is suggested to use target costing for product costing.

 The weak relationships between these companies and their suppliers is transformed to a more
collaborative structure and if the integration degree of the design processes is increased, the
benefits to be gained from the target costing process will increase evenly.
 Majority of these companies operate in competitive market conditions. Target costing should
be used to increase the competitiveness of the firms within the industry and in the global
market.
 Higher percentage of workforce in Jute, Paper, and Printing, Tannery, and Textile sectors
implies that the factory is not automated enough. So, automation is recommended in order to
reduce production costs and to increase profitability by implementing Target costing.
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6.3 Conclusion
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Strategic management accounting is taking a more central role in companies’ decision making
plans than ever before and target costing is one of the tools they are adopting. The target costing
process considers the voice of the customer, incorporates earlier supplier involvement and
concurrent engineering, utilizes cross-functional teams, and focuses on creating a good or service
that is both desirable and affordable to the customer and profitable to the producing organization.

Target costing is still a relatively new concept to Bangladeshi companies, but is being adopted in
some key industries such as textile and manufacturing and the trend should carry over into other
industries as all firms can benefit from the increased competitiveness that cost management and
profit planning can provide.

The study shows that though privatization and authoritative pronouncement has contributed a lot
in the development of management accounting in Bangladesh, the survey result of the present
practices of management accounting technique in listed manufacturing sector reveals that state
of use of developed techniques (like target costing, throughput costing, life cycle costing) is not
satisfactory.

Modern techniques are being used to face complex situation. Bangladeshi manufacturing
business firms remain far behind the expected situation due to lack of awareness as to benefit of
using the management accounting techniques for better decision making. All concerned people
need to realize the situation and take appropriate action from every corner to overcome this
unwarranted situation. To keep pace with the world changing management accounting
environment, Bangladeshi firms should use the newly developed techniques such as target
costing. The soon it is done, the better it will be, otherwise we shall perish in this competitive
world.

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Appendix-I
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 Sample List

Name of the company

1. Fresh Cement Ltd.
2. Crown Cement Ltd.
3. Sahinepukurs Ceramics.
4. RAK Ceramics
5.Square Consumers product limited
6. ACI Consumers Product Limited
7. Reckit Benkiser Bangladesh Ltd.
8.Square Textiles Ltd.
9. Bex-tex Ltd.
10. Viylee-tex Ltd.
11.AFBL
12. Fu-Wang Foods
13. Romania Foods Limited
14. Square Pharmaceticuls Ltd.
15. Glaxcosmithcline Bangladesh Ltd.
16.Incepta Pharmaceticuls Ltd.
17.Beximco Pharmaceticuls Ltd.
18. Reneta Pharmaceticuls Ltd.
19. Jass Leather Industries Ltd.
20. Limex International Ltd.
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