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9–7 IMPLEMENT TARGET COSTING Costing Best Practices
A cost accounting staff can create the best costing reports in the world, constantly
update this information, and hound the production, engineering, and purchasing
staffs incessantly to improve the situation, and find little change in product costs.
The reason is that most product costs are locked in when the product is designed.
For example, a poor microwave oven design will lead to production inefficiencies
because the product was not designed for ease of manufacturability. Similarly, if
the oven was not designed to be sufficiently sturdy, there will be a number of cus-
tomer returns, resulting in added engineering and manufacturing costs to fix the
problem. Further, the oven may contain nonstandard parts that are both difficult
and expensive to obtain and that may not allow for the use of existing parts used
with other products. Thus, cost accounting is focusing on the wrong target—
product costs during production, instead of product costs during the design stage.
The best practice that addresses this issue is called target costing. Under this
concept, the existing market is reviewed and a target price is determined at which
a certain set of product specifications will probably sell quite well. A design team
is then brought together and assigned the task of creating a product with those
specifications and a maximum cost. The maximum cost figure allows a company
to sell for the previously determined price while still making an acceptable profit.
If it is impossible to produce the product for the maximum assigned cost, the pro-
ject is abandoned. This approach is in contrast to the more traditional method of
designing a product, determining how much it costs when the project is finished,
and then adding on a profit percentage to arrive at a selling price.
The obvious advantage of target costing is that a company has total control
over product costs before any product reaches the production floor. It is easy to
determine which products should be produced and which ones abandoned,
thereby keeping losing or marginally profitable products out of a company’s
product mix. From the accounting department’s perspective, its costing work
shifts away from tracking production costs and into tracking costs during the
design phase. This means that a cost accountant should be reassigned from the
first activity to the latter so that there is a daily review of the range of costs into
which target costs are likely to fall. By shifting the direction of the accounting
department’s costing analysis, one can report on the activities which truly have
the greatest impact on product costs.

Cost: Installation time:

9–8 LIMIT ACCESS TO UNIT OF MEASURE CHANGES

The unit of measure field, an innocuous field in the computer system, can have a
major impact on the accuracy of product costs. When the quantity in a bill of
material or inventory record is created, it has a unit of measure listed next to it.