Factors Influencing the Target Costing Process: Lessons From Japanese Practice

The target costing process at most firms can be broken into three major steps. The first consists of market-driven costing, the second of product-level target costing, and the third of component-level target costing. To identify the factors that influence the target costing process at firms, an exploratory comparative analysis of the target costing processes at six Japanese manufacturing firms is undertaken. From this analysis, five factors are identified that play a role in influencing the target costing process by altering the levels of the benefits that the firms can derive from target costing. The factors that help shape market-driven costing include the intensity of competition and the nature of the customer. The factors that help define the benefits associated with product-level target costing include the firm’s product strategy and the characteristics of the product. Finally, the firm’s supplier-base strategy influences the benefits associated with component-level target costing. It is argued that it is these five factors that primarily determine the magnitude of the benefits that the firm will generate from the application of target costing. As the benefits increase, the amount of energy the firm is willing to expend on the target costing process is expected to increase concomitantly. Therefore, firms that gain significant benefits from target costing are likely to have more extensive target costing processes than those that gain only minor benefits.