"What cost little is valued less?" This statement might be true in regard to luxury goods like diamonds, but it is not true among the relationship between the most business owners and their customers. Indeed competitive pricing is necessary to be successful in today's business life. But what is the right price? (Willax, Paul). The target-costing pricing can help to determine the right price and to influence positively the bottom line. In the following, I will explain the general principle of target costing; the five stages of target cost management, and demonstrate the cause effect-analysis.
2. The history of target costing.
Target costing was first implemented in 1963 by Toyota and had its break-through in the seventies in Japan. Since the beginning of the nineties target costing is used in Anglo-American Countries and Germany (Zerth, Martin).
3. Target costing in general.
Unlike traditional cost management, target costing is concentrated outward and market driven - the customer comes first. Target costing management is based on the idea that the cost of a product can hardly be changed after the design process. But in today's competitive business environment companies are not allowed to fail. For this reason, the firms have to manage the cost right from the moment a product or service is first purposed (Jahn, Domenico; Krystek, Ulrich).
Therefore, target costing does not consider what a product will cost. Instead of this target costing considers how much the customers are wiling to pay for a product. The price determines the cost - the cost does not determine the price (Kehl, Leonhard).
4. The three target costing rudiments.
Three target-costing approaches exist: market-orientated, engineer-orientated, and production-function-orientated (Zerth, Martin). Below, I will focus my exclamation to the production-function-orientated target-costing rudiment.
4.1 The five stages of target cost management.
The first four steps are related to the Japanese concept genke kikaku, which comprised the different stages that are used to reduce the cost associated with the design of a new product.