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What Data Is Needed For A Target Costing Analysis?

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The typical accountant is used to extracting data from a central accounting database that has been carefully stocked with the most accurate and reliable data, from such a variety of sources as accounts payable, billings, bills of material, and inventory records. However, the accountant who is assigned to a target costing project must deal with much more poorly defined information, as well as data that is drawn from much different sources than he or she may be accustomed to using.

In the earliest stages of a product design, the accountant must make the best possible guesses regarding the costs of proposed designs. Information about these costs can be garnered through the careful review of possible component parts, as well as comparison with the cost of existing products that bear some similarity to the designs now under review. No matter what the method, it will result in relatively rough cost estimates, especially during the earliest stages of a new product’s development. To operate in this environment takes an accountant with a wide-ranging view of costing systems and the willingness to start with rough estimates and gradually polish them into more concrete information as designs gradually solidify. Accordingly, accountants with a narrow focus should not be allowed on a product design team.

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Though cost estimates will be admittedly rough in the earliest stages of a new product design, it is possible to include with the best estimate an additional estimate of the highest possible cost that will be experienced. This additional information lets management know whether there is a significant degree of risk that the project may not be able to achieve its desired cost target. Though this information can result in the outright termination of a project, it is much more common for senior management to interview the project director in some detail to gain a better understanding of the variables underlying an excessively high cost estimate, as well as the chances that those costs can be reduced back to within the targeted levels. Only after obtaining this additional information should a company make the decision to cancel a product design project.

There are also new sources of data that an accountant can access. One is competitor information, which is collected by the marketing staff or an outside research agency. This database contains information about the prices at which competitors are selling their products, as well as the prices of ancillary products, and perhaps also the discounts given at various price points. It can also include market share data for individual products or by firm, as well as the opinions of customers regarding the offerings of various companies and the financial condition of competitors.

This information is mostly used to determine the range of price points at which a company should sell its existing or anticipated products, as well as the features that should be included at each price point. The extra information about the financial condition and market shares of competitors may also be of use, since a company can elect to alter the pricing of its products if this will lead to a better market position against them. This database is of great value to the accountant in determining the price at which products should be released to the market.

Another database used by the accountant is one that details the cost structure of competitors. This information is compiled by a combination of the marketing and engineering staffs through a process called reverse engineering. Under this methodology, a company buys a competitor’s product and then disassembles it in order to determine the processes and materials used to create them, and their costs. This information is of great value in determining the greatest allowable cost of a new product design, since a company can copy from the methods and materials used by a competitor if this will lead to a reduction in costs. The information is also of use from a pricing perspective, since it gives management some idea of the profits that a competitor is probably obtaining from sales of its products; it can then aggressively price some or all of its competing products low enough to take away some of the profits the competitor would otherwise enjoy, possibly putting it in a severe financial situation.

Another database that the accountant should peruse is that of cost data. This is not the inventory or bill of materials data that is already available in the typical accounting database, but rather the costs that are associated with specific product features or the production functions required to manufacture them. This type of information is not at all commonly found in the accounting system. Instead, the engineering staff may have compiled, over the course of numerous design projects, a set of cost tables that itemize the costs of those components or clusters of components that are used to give a product a specific feature. Also, the cost of specific production functions generally requires the in-depth analysis that can be obtained only through a prolonged activity-based accounting review. If none of this information is available, an enterprising accountant that is assigned to a product design team may take it upon herself to conduct this cost research, thereby not only improving the costing database of the current product design team, but also providing a valuable basis of information for future design teams.

Yet another database is that of engineering data. This information does not stop with the usual bills of materials, since it also includes notes on upcoming technological changes that can be used to enhance the features of existing products. There should also be information about the interaction of various components of a product, so that one can predict what cost changes are likely to arise in one subsystem of a product if a part is reconfigured in another subsystem. Further, there should be information available about the changes in costs that will arise by using a smaller or greater number of fasteners, different materials, different product sizes or weights, or a host of other factors. All of this information is not easily reduced into a standard database format, and so it tends to be partially paper based and not so well organized as the information stored in other databases. Nonetheless, this is a valuable tool for the accountant, since it yields many clues regarding how costs can be altered as a result of changes in product designs.

The final database that is available to the cost accounting member of a design team is supplier information. This should include information about the previous quality, cost, and on-time delivery performance of all key suppliers, as well as the production capacity capabilities of each one. It may even reach a sufficient level of detail to include assumed profitability levels for each supplier. The accountant can use this information to determine which standard parts are no longer acceptable for future product designs, based on a history of high costs, poor quality, or inadequate on-time delivery performance. Also, if suppliers clearly have inadequate profits, this may signal their inability to obtain further cost reductions through capital asset purchases, which may call for the need to switch to a different supplier.

Based on the wide variety of data sources noted in this section, it is evident that the accountant who is an integral member of a product design team has access to a great deal of information that is of great use in determining product prices and costs. However, few of these data sources are the same as the typical accountant is used to accessing, nor do they contain the extremely high level of data accuracy that is more common in an accounting database. Consequently, the accountant who uses this information must be well trained in its use as well as its shortcomings, and be able to use it to realistically portray expected cost and margin levels, given its imprecise nature.

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?

How To Control The Target Costing Process?

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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