Conceptual Framework for Launching and Implementing. Target Costing in Automotive Industry

• Author: Mahdi Naqdi Bahar
• Position: Masters of commerce (M.COM). Specialized in corporate accounting and financial management. Department of commerce and research centre. “University of pune, India”. Bachelor of business administration (B.B.A). “Islamic azad university, north branch of tehran, Iran”

Introduction

Cost management method used by automakers must be useful for the production of new products which meets the customer’s demand at lowest cost as well as an aid to cost reduction of existing product by eliminating wastes. To achieve this, automakers need the total cost management system which includes target costing. Environmental changes in automotive industry for example: the shortening of product life cycle, diversification of customer’s demands and highly competition in automotive industry are inevitable .With such changes, cost management method used, must be useful for production of new products which meets customer’s demands at lowest cost. On account of this, automakers have come to need total cost management which includes product development and design activities as well as product activities. This contrasts with traditional cost management which focused on cost control in the production stage. In fact the most of the costs in the production stage are determined in the stage of new product development and design indicated the need for total cost management. Target costing is an activity which is aimed at reducing the life-cycle costs of new products, while ensuring quality and customer requirements, and by examine all possible ideas for cost reduction at the product planning, research and development, and the prototyping phases of production. Target costing is an important tool because it promotes cost consciousness and focuses on profit margin, both of which strengthen an organization’s competitive position.

Advantages of Target Costing for Automotive Industry

As seen in the target costing history, automotive sector is the one which has applied the elements of target costing extensively since 1970s, and it is not surprising that there are case studies that exhibit the benefits of target costing in automotive sector. For example, in the study of Cooper and Chew (1996); the authors conducted a case-study in Japanese Isuzu and highlighted that target costing was an efficient strategy versus the pressure of lean competitors that reacted in a very short time. Although the new product design stage offers significant reduction opportunities for target costing process, Shank and Fisher (1999) argues that target costing might be applied to...