Target costing: a market-driven management method
Target costing was invented by Toyota in 1965 (Tanaka, 1993). In Japan,
management accountants have worked hard to link their product-costing
systems to their companies’ strategies for product innovation. Japanese
companies seem to use these accounting systems to motivate employees to
act in accordance with their long-term strategies rather than as a tool for
providing senior managers with precise and detailed data on profits, standard
costs and variances. Japanese accounting systems emphasize doing what it
takes to achieve a desired performance level under market conditions.
Management accountants help motivate market-driven behavior by using a
market-based allowable cost that has to be realized if the company is to be
profitable in a competitive market (Hiromoto, 1991). Under these conditions, market prices critically influence a company’s or a division’s
performance. Both the manufacturing and the marketing functions are
encouraged to respond to market demand and competitive trends rather than
merely focus on internal performance indicators. Under this approach, the
marketing department is able to make product decisions without accepting
costs as a given, which increases pressure on the sales force to operate
within the parameters of the current market environment. Business as usual
is not a major characteristic of target costing.