Target Costing In Product Manufacturing – A Case Study

Challenges in Cost Management

The issue presented in the case study is that Orange Mount Bikes had been considering the introduction of the new braking system that permits the bikers for descending the slopes are steep by utilizing the newly developed braking pattern. The firm has been considering launching a new line of products having the newly developed design of brakes. However, it must be noted here that the firm utilizes target costing as a part of the costing structure. Target costing refers to the particular system of costing that determines the life-cycle cost of the product that would be enough to develop the particulars of the product without compromising on the desired amount of profit.

Now, the question that has been presented aims to look into the fact as to why Vanessa had formed a team in order to manage the manufacturing design of the product. Vanessa carries out such a task because the company follows the procedure of target costing and in order to acquire the desired amount of profit, the target cost should be fixed at £855. However, with the newly integrated biking system the cost is coming up at £905. Therefore, the team that has been appointed by the Vanessa consists of a marketing expert who will think of the marketing strategies that may be adopted in order to reduce the cost of manufacturing the bike. The team also consists of the engineering, purchasing, accounting and administration personnel who can further give their recommendation for reducing the cost of manufacturing the product. The engineer might further redesign the product for reducing the cost. The primary purpose of the formed team is to assemble information in regards to the current costs and develop methods for reducing the cost of manufacturing the product.

The structure of the team and the potential areas that are considered by the newly formed team for reducing the cost of the product are as follows:

• The team that has been formed by Vanessa consists of a marketing personnel, engineer, purchasing personnel and accounting and administration personnel.
• Customer surveys have also been conducted which have helped the team to find out that there are five features which matter the most in case of a customer. These are that the weight of the bike, the withstanding power of the bike to take upon hard riding, the way the bike looks and the degree of comfort that the bike can provide to its rider
• These factors have been further analyzed and arrived at an initial price in regards to the Mountain Braker
• The engineer who is a member of the team will alter remodel the design of the bike for the purpose of incorporating the new braking system into the model
• The information in regards to the cost of the current model has also been calculated and considered for the identification of the effective methods that could be utilized for reducing the cost of the product
• The manufacturing cost has been reduced by an amount of £30
• The cost in regards to selling and distribution has been reduced by £5
• The cost in regards to warranty and support has been reduced by £5
• The Administration cost has been reduced by £10

These considerations give an overview into the fact that the team has considered the reduction of cost in the most potential areas. However, it must be noted here that the team could have reduced the cost of selling and distribution by £10 without reducing the cost of warranty and support. This is because compromising with the after sales service that is warranty and support could certainly hamper business (de Melo et al., 2016).

The cost structure as recommended in part (ii) of the question could be as follows:

Forming a Cost Reduction Team

The above table depicts the fact that the decrease in the warranty and support in regards to the product have not been compromised. However, the figure of target cost has been arrived at by the decreasing the selling and distribution costs by a larger percentage.

Target costing refers to that system of costing which aims to match the features of a particular that is being manufactured by a firm with its current ongoing price in the market by keeping in mind the profitability goals of the company. As evident from the provided case study of Orange Mount Bikes, by the deducting the desired profit from the market price of the product the amount of maximum permissible cost can be arrived at. This means that the determination of the target cost is facilitated by the deduction of a profit margin from the market price of the product (Ilg, Hoehne and Guenther 2016).

The advantages of target costing can be described as follows:

• The implementation of a target costing system inside a business ensures the implementation of a proper plan or schedule in regards to marketing and other essential procedures of business (Ofileanu 2015)
• Target costing is an essential feature of marketing and utilization of it ensures the reaching of the top position in the marketing world (Ofileanu 2015)
• The customers will be able to receive products that are of the optimum quality as a target costing structure enables the business firm to satisfy its manufacturing needs at a cost that is affordable (Ofileanu 2015)
• Target costing also enables the employees to manufacture products that are of the optimum quality (Segeth-Boniecka 2017)
• Target costing also facilitates the utilization of the management control system for establishing and reinforcing the management strategies in the company (Segeth-Boniecka 2017)
• It further leads to the integration of the activities of the supplier with the requirements of the customers for designing the product that is suitable for customer use. This can be further explained by the example of the case study of the Orange Mount Bikes. The Orange Mount Bikes before introducing the new product in the market had conducted a customer survey which further identified the areas of the product that should be focused upon in order to gain the support of the customers (Segeth-Boniecka 2017)
• A major advantage of target costing is that it fixes the cost of a particular product on the basis of the willingness of the customer to pay for it (Diefenbach, Wald and Gleich 2018)
• Furthermore, target costing enables the management of a firm to identify the potential market areas or opportunities. These are the areas that fix the target selling price at the maximum level (Diefenbach, Wald and Gleich 2018)
• Target costing also facilitates the reduction in the time period in regards to the development cycle of  a product (Diefenbach, Wald and Gleich 2018)
• Target costing facilitates the reduction in the cost of the product significantly (Rybkowski 2016)
• Lastly, target costing enhances the entire process beginning from product idea till the introduction and distribution of the product in the market for the purpose of selling and acquiring the desired profit (Rybkowski 2016)

The limitations of target costing can be listed down as follows:

• The process in regards to development can be stretched to a certain extent that is longer than assumed or expected. This is because target costing involves a handful number of processes in order to devise a product at a lower cost for ensuring the fact that it meets the target cost and the criteria that has been set. A major but common issue in regards to target costing is that the manager of the business organization does not become ready to stop a certain project on the account of the reason that its costing goals are not met with. It must be noted here that a firm using the target costing method should be alert about the fact that whether the project is moving towards a target cost within a shorter period of time. If the scene is not so then the project should be dropped (Lima 2016)
• Target costing involves rigorous cost cutting. This means that in order to arrive at the targeted cost of the product the management of the firm might cut upon various costs that the stakeholders of the firm feel necessary to include. Therefore, this may result in employee dissatisfaction, which will ultimately result in drop in production rate by them (Lima 2016)
• A major portion of target costing involves designing of the product which in turn involves opinion or suggestions from the different levels of business including different departments. The different departmental executives have different perspective in regards to the design of the product. Moreover, the design teams have their own viewpoint. This leads to unnecessary confusion and results in a faulty layout or design of the product (Lima 2016)

Thus, these are the limitations and benefits of target costing and it can be evidently stated here that in spite of the potential disadvantages, the marketing world of the modern day demands the utilization of target costing for the establishment of a profitable business.

References

de Melo, R.S.S., Do, D., Tillmann, P., Ballard, G. and Granja, A.D., 2016. Target value design in the public sector: evidence from a hospital project in San Francisco, CA. Architectural Engineering and Design Management, 12(2), pp.125-137.

Diefenbach, U., Wald, A. and Gleich, R., 2018. Between cost and benefit: investigating effects of cost management control systems on cost efficiency and organisational performance. Journal of Management Control, pp.1-27.

Gonçalves, T., Gaio, C. and Silva, M., 2018. Target costing and innovation-exploratory configurations: A comparison of fsQCA, multivariate regression, and variable cluster analysis. Journal of Business Research.

Ilg, P., Hoehne, C. and Guenther, E., 2016. High-performance materials in infrastructure: a review of applied life cycle costing and its drivers–the case of fiber-reinforced composites. Journal of Cleaner Production, 112, pp.926-945.

Jiang, L. and Hansen, C.Ø., 2016. Target costing as a strategic tool to commercialize the product and service innovation.

Lima, A.C., da Silveira, J.A.G., da Silva, S.H.F. and Ching, H.Y., 2016. Target costing: exploring the concept and its relation to competitiveness in agribusiness. CEP, 60, p.905.

Mörtl, M. and Schmied, C., 2016. Design for Cost—A Review of Methods, Tools and Research Directions. Journal of the Indian Institute of Science, 95(4), pp.379-404.

Ofileanu, D., 2015. TARGET COSTING FUNCTIONS. Revista Economica, 67(5).

Rybkowski, Z.K., Munankami, M., Shepley, M.M. and Fernández-Solis, J.L., 2016, July. Development and testing of a lean simulation to illustrate key principles of Target Value Design: A first run study. Proceedings of the 24th annual conference of the International Group for Lean Construction.

Segeth-Boniecka, K., 2017. Target costing as an element of the hard coal extraction cost planning process. Zeszyty Teoretyczne Rachunkowo?ci, (94 (150)), pp.145-157.

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