Integrating Target Costing and Resource Consumption Accounting

(ProQuest: . denotes formulae omitted.)IntroductionIncreased global competition creates pressures on firms to offer their products at competitive prices. Accordingly, firms respond to these pressures by focusing on customer value, so that they can maintain their presence in the market. A firm should not just match or surpass what competitors can do, but also discover what customers want to buy and then satisfy their expectations while maintaining profitability. Target costing plays the role of balancing product's profitability and customer value. Target costing is primarily a technique for profit management whose objective is to ensure that new products, or new models of existing products, generate sufficient profits to enable the firm achieve its long-term profit plans. This objective can only be achieved if products are designed to satisfy the demands of the firm's customers and to be manufactured at a sufficiently low cost. Target costing first identifies the cost at which the product must be manufactured so that the profit objective can be achieved, and then creates the environment that helps ensure the target cost is achieved.Target costing requires cost information that has feedforward ability to assist in managing and controlling costs for future products. A lot of studies, i.e., IMA, 1998; Cokins, 2002; Sani & Allahverdizadeh, 2012; Pazarceviren & Celayir, 2013, suggested the integration of target costing with activity-based costing (ABC) which was believed that it assists accurate estimation of drifting costs, provides cost structures of design alternatives, and is used as a tool for achieving target cost.Unfortunately, ABC inherently suffers from a number of problems concerning resource consumption and cost behaviour which would make the integration of ABC and target costing counterproductive. First, ABC strictly adopts the work principle which emphasises that costs are incurred only through firm's activities. Accordingly, ABC does not recognise the interrelationships among resources and the fact that cost behaviour should be addressed through the pattern of consuming resources either by other resources or directly by the final output (Balakrishnan, et al., 2012). Second, ABC only defines resource consumption by costs, based on selected cost drivers. This ignores the fact that the nature of cost could change at the time of consuming resource by the final output or another resource (Clinton and van der Merwe, 2008). This paper suggests shifting the focus from following costs to following resource quantities through a quantitative model based on RCA approach. RCA focuses attention on resources, their interrelationships, and how resource outputs are consumed. RCA overcomes the problems of ABC concerned with resource consumption and cost behaviour, as the resource consumption should be defined by resource quantities, and the cost behaviour should be defined according to the resource consumption pattern by the consuming object at the time of consumption.Target CostingThe Meaning of Target CostingTarget costing is a cost management tool that aims at managing all product costs throughout the design stage, as well as a profit management technique that ensures a new product is sufficiently profitable to justify its production (Kee and Matherly, 2013). According to the CAM-I definition, target costing is much more than a costing system; it is a comprehensive profit planning and cost management system that is price-led, focuses on customer, focuses on product and process design, involves cross-functional teams to manage product from conception to production, is extended along the value chain, and aims to minimise life cycle costs (Ansari et al., 2006). Target costing is not limited to new product development; it can be also applied to current products which management seeks to reduce their production costs (Yu-Lee, 2002). In addition, target costing is not a unique tool that is used separately. …