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The paper provides an overview of research published in the innovation and operations management (IOM) literature on 15 methods for cost management in new product development, and it provides a comparison to an earlier review of the management accounting (MA) literature (Wouters & Morales, 2014).

This structured literature search covers papers published in 23 journals in IOM in the period 1990–2014.

The search yielded a sample of 208 unique papers with 275 results (one paper could refer to multiple cost management methods). The top 3 methods are modular design, component commonality, and product platforms, with 115 results (42%) together. In the MA literature, these three methods accounted for 29%, but target costing was the most researched cost management method by far (26%). Simulation is the most frequently used research method in the IOM literature, whereas this was averagely used in the MA literature; qualitative studies were the most frequently used research method in the MA literature, whereas this was averagely used in the IOM literature. We found a lot of papers presenting practical approaches or decision models as a further development of a particular cost management method, which is a clear difference from the MA literature.

This review focused on the same cost management methods, and future research could also consider other cost management methods which are likely to be more important in the IOM literature compared to the MA literature. Future research could also investigate innovative cost management practices in more detail through longitudinal case studies.

This review of research on methods for cost management published outside the MA literature provides an overview for MA researchers. It highlights key differences between both literatures in their research of the same cost management methods.

To provide an overview of research published in the management accounting literature on methods for cost management in new product development, such as a target costing, life cycle costing, component commonality, and modular design.

The structured literature search covered papers about 15 different cost management methods published in 40 journals in the period 1990–2013.

The search yielded a sample of 113 different papers. Many contained information about more than one method, and this yielded 149 references to specific methods. The number of references varied strongly per cost management method and per journal. Target costing has received by far the most attention in the publications in our sample; modular design, component commonality, and life cycle costing were ranked second and joint third. Most references were published in Management Science; Management Accounting Research; and Accounting, Organizations and Society. The results were strongly influenced by Management Science and Decision Science, because cost management methods with an engineering background were published above average in these two journals (design for manufacturing, component commonality, modular design, and product platforms) while other topics were published below average in these two journals.

The scope of this review is accounting research. Future work could review the research on cost management methods in new product development published outside accounting.

The paper centers on methods for cost management, which complements reviews that focused on theoretical constructs of management accounting information and its use.

In this article, we examine the link between product development organization and target cost management. More specifically, we investigate the interactive effects of alternative product development organizations, methods for setting target costs, and alternative decision-making authority in assigning targets. Based on the results of a questionnaire survey of Japanese manufacturers, we intend to provide some early evidence on those interactive effects to stimulate further research in this area of target cost management. We find that organizational efficiency is connected with cost reduction performance in target cost management from the two perspectives: (1) the relationship between the simultaneous involvement of project leaders and functional staff and the use of a particular target cost-setting method, and (2) the correlation of the simultaneous project-function involvement with the level of expected cost reduction performance. No particular product development organization shows any preference for the use of a target cost-setting method. The preference, however, is shown clearly when a particular target cost allocation decision authority is aligned with the use of a target cost-setting method. Companies with higher levels of cost reduction performance (expected or experienced) tend to make project leaders and functional staff get simultaneously involved in target cost allocation decisions.

The essential investments in new product development (NPD) made by industrial companies entail effective management of NPD activities. In this context, performance measurement is one of the means that can be employed in the pursuit of effectiveness.

Since quality cannot be manufactured or tested into a product but must be designed in, effective product design is a prerequisite for effective manufacturing. However, the concept of effective product design involves a number of complexities. First, product design often overlaps with such design types as engineering design, industrial design and assembly design. Second, while costs are key variables in product design, costing issues often arise that add more complexities to this concept.

The management accounting literature provides activity-based costing (ABC) and target costing techniques to assist product design teams. However, when applied to product design these techniques are often flawed. First, the product “user” and “consumer” are not identical as often assumed in target costing projects, and instead of activities driving up the costs, managers may use budgeted costs to create activities to augment their managerial power by bigger budgets and to protect their subordinates from being laid off. Second, each of the two techniques has a limited costing focus, activity-based costing (ABC) focusing on indirect costs and target costing on unit-level costs. Third, neither technique accounts for resource interactions and cost associations.

This paper applies the new method of associative costing (Bayou & Reinstein, 2000) that does not contain these limitations. To simplify the intricate procedures of this method, the paper outlines and illustrates nine steps and applies them to a hypothetical scenario, a design of a laptop computer intended for the college-student market. This method uses the well-known statistical techniques of clustering, Full Factorial design and analysis-of-variance. It concludes that in product design programs, the design team may need to make tradeoff decisions on a continuum beginning with the design-to-cost point and ending at the cost-to-design extreme, as when the best perceived design and the acceptable cost level of this design are incongruent.

For firms using target costing, separating decision management from decision control helps to minimize the agency costs incurred throughout a product's economic life. Prior literature focuses on decision-management issues related to target costing, such as new product development (i.e., initiation) and production (i.e., implementation). In contrast, this article highlights the decision control aspects of target costing, which consist of ratifying product proposals and monitoring the product's implementation. While products initiated with target costing are chosen because they meet their allowable cost, product ratification requires assessing how well products contribute toward strategic goals, such as improving the firm's market value. To facilitate the ratification decision, this article develops an equation for determining a product's net present value (NPV) based on the same accounting data used during the initiation process. The article also describes monitoring a product's implementation through periodic comparisons to flexible budgets and a post-audit review at the end of the product's economic life.

This classroom activity helps students tie together the concepts of absorption costing for inventory, selling and administrative (SA) cost calculations, and sales price decisions. It shows students how all costs fit together and are used to make business and pricing decisions, synthesizing discrete sections of most managerial or cost accounting books into a complete process. The activity is designed to be run in one 75-minute class session using an Excel template that allows students to focus on business decisions and less on the mechanics of completing calculations. The seven segments of the activity have students calculate target cost, allocate items of overhead into production and service departments, calculate absorption product cost, allocate SA to the production departments, determine the full cost, evaluate product viability, and calculate target price. At the end of the activity, students better understand how all these cost items fit together in a manufacturing setting.

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

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.

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.

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.

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.

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.

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