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How To Control The Target Costing Process?



A target costing program will eventually result in major cost reductions if design teams are given an unlimited amount of time to pass through a multitude of design iterations. However, there comes a point where the cost of maintaining the design team exceeds that of the savings to be garnered from additional iterations.

Also, most products must be released within a reasonably short time frame, or else they will miss the appropriate market window when they will beat the delivery of competing products into the market.


To avoid both of these costs and time delays, we use milestones as the principal control point over a target costing program. There should be a number of milestone reviews incorporated into a target costing program. Each one should include a thorough analysis of the progress of the design team since the last milestone review, such as a comparison of the current cost of a design as compared with its target cost. The key issue here is that the amount of cost yet to be worked out of a product must shrink, on either a dollar or percentage basis, after each successive milestone review, or else management has the right to cancel the design project. For example, there may be a standard allowable cost variance of 12 percent for the first milestone meeting, then 10 percent at the next meeting, and so on until the target cost must be reached by a specific future milestone date. If a design team cannot quite reach its target cost, but comes very close, then the management team should be required to make a go/no-go decision at that time that either overrides the cost target and sends the design into production, allows time for additional design iterations, or terminates the project.

A milestone can be based on a time budget, such as one per month, or on the points in the design process when specific activities are completed. For example: a milestone review will occur as soon as each successive design iteration has been completed, or perhaps when conceptual drawings are finished, when the working model has been created, or when the production pilot has been run. In this latter case, there will be many more steps that the management group can build into the milestone review process, so that cost analyses become a nearly continual part of the target costing regimen.

Hey, have you read:

Improve Profitability With Target Costing

How Does Target Costing Work? and What Is Value Engineering?

Under What Scenarios Is Target Costing Useful? Are There Any Problems With Target Costing?

What Data Is Needed For A Target Costing Analysis?

How To Measure The Success Of A Target Costing Program?

What Is The Accountant’s Role In A Target Costing Environment?

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