Target Analysis : Cost, Quality or Both?

K R Balachandran is Professor of Accounting at the Stern School of Business, New York University and Bin Srinidhi is Associate Professor of Accounting at the Graduate School of Management, Rutgers University. Growing competition from foreign companies, notably from Japan, has resulted in increased attention being paid to cost and quality issues in the US. The traditional view is that improvements in quality entail increased costs and are generally associated with reduced productivity. However, the more recent thought on the matter, espoused by Deming [1982] among others, treats quality and cost as complementary characteristics. We discuss here the target analysis approach which brings together cost and quality issues in a complementary manner. Target analysis consists of target cost and target quality components which are efficiently put together to achieve the overall strategic objectives of the firm. In contrast, traditional standard costing approach, while emphasizing cost control, fails to explicitly incorporate quality issues. Most of the manufacturing costs are committed during the design stage which occurs early in the life cycle of the product. This early commitment considerably constrains the ability to attain cost reductions during the manufacturing stage. On the other hand, if cost reduction objective is given sufficient emphasis during the conceptual development and design stages, significant cost efficiencies can be realized. The life cycle cost concept has been documented in Berliner and Brimson [1988] and some target costing ideas are given in Kaplan and Atkinson [1989].