The best measure of the success of a target costing program is the ratio of total actual product costs to target costs. The goal should be to achieve a percentage of 100 percent or less. To calculate this measurement, divide the total of actual expected product costs by the total amount of targeted costs.
A footnote should accompany this measurement, stating the expected production volume at which the costs are stated. The reason for this extra wording is that component costs can change drastically if assumed volumes vary. For example, if a target cost is based on an expected unit volume of 50,000, but the actual expected costs are based on a revised unit volume of only 10,000, then it is quite likely that the cost of components will increase dramatically. The formula is as follows:
Total of actual product costs [divide] Total of target costs
For example: the engineering manager for a copier design team is conducting a post-design review of the team’s performance. The team did not meet its target cost goal, and the manager is wondering what could have given earlier warning of the costing problem. More active management of the design process after the second milestone might have prevented this problem from arising.
The element missing from this measurement is the quality of the resulting products. A design team can quite possibly achieve a target cost and issue a completed product design, but if its associated warranty and scrap costs are too high, the lifetime cost of the product to the company will exceed the initial target cost. Consequently, this measure must be coupled with a set of minimum quality specifications; one may also want to track lifetime target costs, rather than just the initial target product costs, in order to quantify the cost of quality.
Another issue, as noted under the description of the formula, is that the individual component costs used to compile the total target cost can vary greatly, depending on the assumed volume of production; this is because components that are purchased in bulk are typically less expensive than when they are bought in small quantities, as would be the case for small production volumes.
An additional issue is that a design team usually is required to meet increasingly stringent costing targets as it moves closer to the final approval of its product design.
As it passes each design milestone, its actual projected cost is expected to come a bit closer to the target cost. Consequently, it makes sense to calculate this measurement at every milestone and compare it with the target cost at that point, rather than waiting until completion of the entire project to see whether the costing goal was attained. By measuring on this trend line, management can spot design cost problems early, and correct them before designs are finalized.
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