Target Costing in the Presence of Product and Production Interdependencies

Abstract

Purpose

This paper examines how target costing decisions can be impacted by product and production interdependencies.

Design/methodology/approach

Numerical examples are used to investigate the effect that product and production interdependencies have on target costing decisions. Mixed integer programming and simulation are used to model the interrelationships between a product’s cost reduction effort and related decisions such as product mix, pricing, and capacity acquisition. Product and production interdependencies are introduced by evaluating a product with multiple price and demand options, capacity is acquired in large discrete quantities, and resources have economies of scale. Analyses of choices made with and without considering product and production interdependencies are used to evaluate their effects on target costing decisions.

Findings

A product’s cost reduction effort cannot be determined independently of other production-related choices, such as product mix, capacity, and price, in the presence of product and production interdependencies.

Research implications

The findings of this paper underscore the need for additional research to understand the conditions that impair target costing decisions and the economic consequences of suboptimal decisions.

Practical implications

Rather than assessing target costing decisions at the individual product level, these decisions must be evaluated at the portfolio level of the firm’s operations.

Social implications

Suboptimal target costing decisions impact the products and product mix that the firm chooses to offer, which affects the ability of organizations to effectively achieve their strategic goals.

Originality/value

This paper identifies new limitations to target costing that can help managers understand the technique better and lead to improved target costing decisions.

Citation

Kee, R. and Matherly, M. (2013), "Target Costing in the Presence of Product and Production Interdependencies", Advances in Management Accounting (Advances in Management Accounting, Vol. 22), Emerald Group Publishing Limited, Leeds, pp. 135-158. https://doi.org/10.1108/S1474-7871(2013)0000022011