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Suggested Citation
Celayir, D. (2020). Target Costing as a Strategic Cost Management Tool and a Survey on Its Implementation in the Turkish Furniture
Industry, Journal of Business Research-Turk, 12 (2), 1308-1321.
İŞLETME ARAŞTIRMALARI DERGİSİ
JOURNAL OF BUSINESS RESEARCH-TURK
2020, 12(2), 1308-1321
https://doi.org/10.20491/isarder.2020.913
Target Costing as a Strategic Cost Management Tool and a Survey on Its Implementation
in the Turkish Furniture Industry
Duygu CELAYİR a
a Istanbul Commerce University, Department of Accounting and Auditing, Istanbul, Turkey. dcelayir@ticaret.edu.tr
ARTICLE INFO ABSTRACT
Keywords:
Strategic cost management
Target costing
Furniture Industry
Received 31 January 2020
Revised 2 May 2020
Accepted 5 May 2020
Article Classification:
Research Article
Purpose – Target Costing is implemented in product design and development phases, and hence
aims at cost reduction at the first stage of the life-cycle. This method is primarily intended to enable
enterprises to seize their desired profit margin on top of the product cost and determine a price that
corresponds to what customers are willing to pay. This purpose of this study is to examine the target
costing method and attempts to determine the extent to which it is implemented in the Turkish
furniture industry.
Design/methodology/approach – This study examines the extent to which target costing is
implemented at the enterprises affiliated with the Turkish Furniture Industrialists’ Association and
the competencies related with the implementation principles of target costing. It therefore
determines the extent to which target costing is implemented in the Turkish furniture industry. The
enterprises within this study are selected from furniture industry. So Turkish Furniture
Industrialists’ Association is selected because of reflecting furniture companies the best.
Findings – Majority of the enterprises implementing target costing stated it helpe d address customer
requirements and reduce costs. They will be able to utilize the method as a significant tool for
competitive advantage if they follow target costing principles more diligently. Enterprises not
implementing it, on the other hand, are observed to be internally following the principles of the
method in general terms. Its implementation will be successful if the senior management assumes
an active role for its organization-wide ownership.
Discussion – The findings obtained from the study are of great importance for the enterprises which
want to calculate the unit costs related to the products correctly. But, majority of the enterprises in
the furniture industry are observed to be employing traditional cost management systems in setting
the selling price. Enterprises should leave traditional methods behind and opt for the methods of
target costing including market research to provide products at the selling price that is desired by
the customers.
1. Introduction
Customer demands and expectations that rapidly change due to technological developments resulted in
shorter product life-cycles and made it difficult to capitalize on economies of scale. The share of fixed costs, in
particular, expanded within unit production quantities. On the other hand, customers’ expectations rose
steadily together with more intense competition among enterprises. This has pushed enterprises to pay more
attention to product and service quality, develop strategies for competitive advantage, and determine their
costs more accurately (Taylor, 2000). It has become necessary to reach quality, cost, time and design goals
simultaneously and fully for enterprises to offer products at the selling price determined by the market and in
the quality desired by customers while, nonetheless, obtaining a long-term competitive edge. This necessity
brought along the approach toward developing products in a more market-driven manner and managing
costs strategically.
Methods and models including total quality management, change engineering, flexible production systems,
value engineering/analysis, target costing, product life-cycle costing, activity-based costing, kaizen costing,
quality costing, environmental costing, on-time production, benchmarking, comparative analysis, and
corporate scorecards emerged in the face of aforementioned developments (Can, 2004). All these strategic cost
methods share one thing in common, which is the fulfillment of customer expectations in the shortest time
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period, with ultimate quality and minimum cost. Achieving this goal, however, requires product costs to be
monitored and managed throughout the entire product life-cycle, while making it essential to eliminate all
redundant activities in production. Target Costing is among these methods that emerged as a result of the
approaches mentioned above. A product development strategy driven by customer expectations and market
opportunities, target costing is a strategic profit and cost management process (Yükçü, 1999). It can be applied
to the product in design and development phases in integration with other contemporary cost methods, and
therefore is aimed at reducing costs at the initial stage of any given product/service. This study examines the
extent to which target costing is implemented at the enterprises affiliated with the Turkish Furniture
Industrialists’ Association and the competencies related with the implementation principles of target costing.
It therefore determines the extent to which target costing is implemented in the Turkish furniture industry.
2. LITERATURE REVIEW
Enterprises should offer right products at right prices and manage their costs to make profits and survive in
today’s global competitive market. Target costing is one of the methods developed to achieve this goal. Target
costing practices guarantee the quality and reliability standards desired by the customer from a product’s
design phase onwards, while helping enterprises reach the profit margin they prefer (Baharudin and Jusoh,
2015). Target costing is a design-focused and price-driven profit planning tool and cost management system
in which cross-functional teams work (Kaygusuz and Dokur, 2015). Target costing is the concept of price-based
costing instead of cost-based pricing. A target price is the estimated price for a product or service that
potential customers will be willing to pay. A target cost is the estimated long-run cost of a product or service
that allows the enterprise to achieve a targeted profit. Target cost is derived by subtracting the target profit
from the target price (Ramanan, 2000).
Target costing is a method that is applied in initial phases, i.e. before the production methods of a product are
designed and established. When applied, all processes are carried out according to the customer, focused on
production design and then extended to the entire life-cycle of the product. Target costing is intended to
establish the production process that will generate the desired profit. Target costing is a management
methodology aimed at driving the development process by effectively managing cross-functional
relationships. It takes into account the external environment in order to obtain products that meet customer
expectations. The cost of these products is consistent with business goals throughout the life cycle of the
product and based on a feed-forward control (Cooper, 1994). There are various definitions of target costing.
Target costing is a management tool designed to manage planning and design activities of a new product,
serve as a basis for subsequent process stages, and guarantee the profits determined for a product’s life-cycle.
Target costing is a strategic cost management tool that links products, the market and resources, and digitizes
the information regarding them. Target costing is an approach that requires the engagement of all functions
regarding production (Lorino, 1995 ).
According to Cooper and Slagmulder (1997), target costing is an approach that determines the selling price
and life-cycle costs according to desired profitability for the useful life of a product/service to be produced as
per a certain level of quality and function. Everaert et al. (2006) defined target costing as a process during
which product costs are determined in initial phases of new product development that enables such target
costs to be reached in the development process of a new product.
Schmelze and Geiger (1996) described target costing as an effective and proven method reducing product costs
throughout the life-cycle of a product without increasing the time period during which a product is designed
and developed and decreasing quality or functionality. Tanaka (1997) refers to target costing as to a concept
that has two forms of manifestation. The duality of target costing is taken from the producer’s and from the
client’s point of view: first and foremost are the costs that it incurs the manufacturer, such as planning,
designing, developing, manufacturing and selling costs; secondly are the costs borne by the buyer, such as
maintenance, exploiting and elimination cost. Within this scope, target costing is an approach aimed at
reducing product life-cycle costs of new products through examining all ideas related with cost reduction in
product planning, research and development processes provided that quality, reliability and other
expectations of customers are addressed (Kato, 1993). Target costing aims at cost management in planning and
design phases of products/services, while helping managers make more reasonable decisions in development
phase and encouraging employees to adopt a long-term thinking. It is a cost management tool that is used to
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reduce costs with the assistance of production, engineering, R&D, marketing and accounting departments
(Sakurai, 1990).
Target costing is used as a tool to reduce the total life-cycle costs of a product by focusing on design and
planning phases (Kaplan and Atkinson, 1998). It initiates cost management in early phases of product
development, actively extends through the entire value chain and applies cost management throughout the
life-cycle of a product. According to Hansen and Mowen (1999), target costing is an interactive process that is
repeated until a defined target is reached or until it is determined that a target is impossible to reach. Adopting
this approach, they argue that the most reliable way to determine a price is to start out with one that the market
is willing to pay. Seidenschwarz (1993) divides existing definitions under three categories. Definitions of target
costing are categorized as
- market-driven;
- engineering-driven;
- and functionality-driven.
Target costing is a strategic cost management tool that reduces product costs in planning and design phases.
This is achieved through focusing on the integrated efforts of all relevant functions, such as marketing,
engineering, production and accounting, within an enterprise. This cost reduction process is continuously
applied in initial phases of production (Sakurai, 1996). Target costing is primarily intended to enable
enterprises to seize their desired profit margin on top of the product cost and determine a price that
corresponds to what customers are willing to pay. Target cost is determined by the market since product costs
are dictated upon by customers. It is possible to lay down the key assumptions related with the method as
follows (Hacırüstemoğlu and Şakrak, 2002):
- The selling price of the products is set by the target market.
- The profit margin intended to be reached is subtracted from the selling price.
- The remaining amount is determined as the target cost which has to be incurred if the product is
produced.
The target cost shows the difference between the target price and determined profit. In target costing, product
quality should not be overlooked and imbalances between price and quality prevented through thinking with
a focus on the customer (Kalkancı, 2008).
Target costing concept implies an integrated mechanism where we can find the three mentioned orientations,
as it follows (Dimi and Simona, 2014):
- the basic characteristic of the target costing consists in its clear orientation towards the market, the
estimation of the price being made taking into account the estimated price that can be obtained in
future by selling the product on the market;
- establishing the target costing is not made by only taking into account the estimated price accepted
on the market, its objective being that of analysing the characteristics of the new product planning and
designing phases but also by using target cost to track and control the actual incurred costs;
- any resource economy must be made respecting the product’s functionality established by the client,
otherwise any cost reduction will have a negative impact: the consumer may refuse the product.
All the stakeholders within the value chain are expected to be involved in target costing during cost
reduction. Focus should be placed on eliminating waste, deficiencies and errors that may occur during the
product life-cycle. Moreover, stakeholders should be careful about costs related with the rectification of errors,
and re-use or disposal of the deficient product (Helms, Ettkin, Baxter and Gordon, 2005).
2.1. The Aim of Target Costing
Competition pushes enterprises to produce products or services in the quality and with the functions aligned
with customer expectations and demands, whilst necessitating sales thereof at the price determined by the
market (Castellano and Young, 2003). The knowledge on costs in modern production environments cannot be
produced with the speed, benefits and accuracy required by the fierce competition through traditional cost
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methods. It is necessary to develop methods, systems and models that can produce more accurate, faster, more
useful and reliable information, and the need for target costing rises every passing day.
The core objective of target costing is to reduce the costs of new products, which will address customers’
requirements for quality, reliability and functionality, throughout their life-cycles (Dekker and Smidt, 2003,
Kalkancı, 2008). Target costing, while ensuring the continuity of optimum quality, reduces total costs. Within
this scope, target costing ensures optimal balance between quality, functionality and cost. Most production
enterprises employ target costing for the purposes of strategic profit planning (Sakurai, 1990). Other objectives
of target costing could be summarized as follows (Karcıoğlu, 2000):
- Ensuring alignment of enterprises, costs in particular, with the market
- Providing cost management support for a product in initial phases and hence ensuring that product
costs can be managed even in design phase
- Helping enterprises expand their existing market share
- Maximizing profit margins, and ensuring continuous control over cost targets for a dynamic cost
management.
- Helping the corporate strategy take shape according to market requirements.
Also, key features of target costing can be listed as follows (CFI, 2019):
- The price of the product is determined by market conditions. The company is a price taker rather
than a price maker.
- The minimum required profit margin is already included in the target selling price.
- It is part of management’s strategy to focus on cost reduction and effective cost management.
- Product design, specifications, and customer expectations are already built-in while formulating the
total selling price.
- The difference between the current cost and the target cost is the “cost reduction,” which
management wants to achieve.
- A team is formed to integrate activities such as designing, purchasing, manufacturing, marketing,
etc., to find and achieve the target cost.
2.2. Key Principles of Target Costing and the Target Costing Process
Target costing is a market-driven costing system. It is established based on the offers of the competition and
customers’ requirements. Target costing is a system for profit planning and cost methods. It is a functional
system at the heart of which price setting, customer centricity and design lies (Ansari and Bell, 1997). Cost
management is initiated in product development phase and applied throughout the product life-cycle in a
manner to cover the entire value chain. Target costing can best be described as a systematic process of cost
management and profit planning. The six key principles of target costing are (Swenson et al. 2003):
1. Costing per Price: In target costing, target selling price is determined first. The target selling price stands for
the amount consumers consider paying for the products produced by an enterprise. Target profit margin is
subtracted from this price to determine the target cost. Costing per price is composed of two key sub-
principles (Ansari and Bell, 1997). Product and profit margin are determined by market prices. The process
should be regularly analyzed for the enterprise to opt for products with consistent and reliable profit margins.
Target costing is based on knowledge and analyses of active competition. It is important to have an
understanding of how market prices have been set.
2. Focus on customers: Target costing is a process under the impact of the market, and customers’ opinion is
continuously taken into account. Customer requirements for quality, cost, and time are simultaneously
incorporated in product and process decisions and guide cost analysis. The value (to the customer) of any
features and functionality built into the product must be greater than the cost of providing those features and
functionality.
What needs to be considered in product design is elimination of those features that will add on the product
cost but nevertheless fail to bring in further value for the consumer.
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3. Focus on design: Target costing manages costs before they are incurred. Although most costs arise in
production, many of them are caused by issues related with design. Target costing, though, focuses on a design
that enables cost control/reduction throughout the life-cycle of a product (Ansari and Bell, 1997). Cost control
is emphasized at the product and process design stage. Therefore, engineering changes must occur before
production begins, resulting in lower costs and reduced “time-to-market” for new products.
4. Cross-functional involvement: One of the key aspects of target costing is the adoption of a team approach
to achieve the target cost. Team members represent a broad group of people including producers, engineers,
designers, R&D experts, marketing specialists, and suppliers (Sakurai, 1989). Cross-functional product and
process teams are responsible for the entire product from initial concept through final production.
5. Value-chain involvement: Target costing deals with all the stakeholders of a value chain, from vendors and
distributors to customer services. The method is built on long-standing, beneficial relationships to be
established with the aforementioned. This is how it extends cost reduction efforts across the entire value chain,
by partnering with all other parties outside an enterprise (Hacırüstemoğlu and Şakrak, 2002).
6. A life-cycle orientation: The method is primarily aimed at minimizing product life-cycle costs on the side
of both producers and customers. Total life-cycle costs are minimized for both the producer and the customer.
Life-cycle costs include purchase price, operating costs, maintenance, and distribution costs.
There are certain requirements for the effective implementation of those principles (Bahşi and Can, 2001):
- Involving suppliers in product development process;
- Designing products and processes simultaneously;
- Giving a direction to all cost reduction efforts according to customers’ expectations;
- Simplification of design and measurement thereof;
- Establishing teams composed of representatives from different functions in activities related with
target costing; and
- Establishing an organizational structure and culture open to continuous change and improvement.
Target costing process: The target costing process can be summarized in three main stages which are linked
to the development cycle of the product (Sakurai, 1989):
1-Setting the allowable cost that relates to the planning stage (corporate planning) and initial design of the
product;
2-Setting and achieving the target cost that is linked to the detailed design of the product and to the production
3-Plan (industrialization and manufacturing preparation); target cost achievement in the product
implementation phase using standard cost, the kaizen costing technique or value analysis.
The first two stages make up the design phase of target costing, while the third constitutes the operational
phase. The first stage of the target costing process is aimed at determining the allowable cost and is linked to
strategic planning - identifying specific markets, consumers and products that the company intends to develop
- and to the initial design of the product. This cost is determined by calculating the difference between the
price, set according to the logic outlined above, and expected profit and it constitutes the largest value of
resources that can be used by the company to obtain the product.
2.3. The Success of Target Costing
The following requirements should be addressed to achieve desired results with target costing while properly
following up its implementation and carrying out relevant stages (Bozdemir and Orhan, 2011).
Supplier participation: Many large enterprises procure the parts, by-products, semi-finished products, raw
materials and materials used in production from suppliers. Therefore, suppliers should be considered strategic
partners and involved in the process of target costing. It is strategically important to establish good relations
with suppliers and work with fewer suppliers, if possible, because input costs make a direct impact on product
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costs. Within this framework, it would be useful for enterprises to implement supply chain management
principles (Yalçın, 2005).
Simultaneous design: Products have to be designed simultaneously. Rather than researching whether a
product can be produced by designing of its features first, production processes should be made ready
simultaneously with the product design, which would prevent waste of time.
Customers’ expectations: The price is determined as per customers’ expectations and the amount they are
willing to pay in target costing. Therefore, it is important to take customers into account during cost reduction
efforts (Coşkun, 2002-2003). Including customers in the design team and exploring their opinion through
market research or systematic and various methods will enable the design to be developed in the light of such
opinions and negative situations to be identified beforehand and prevented.
Design simplicity and measurement: For a successful target costing system, it is a pre-requisite to simplify
designs as much as possible. The number of parts in a product should be minimized to prevent complications
(Altınbay, 2006).
Establishing a target costing team: An enterprise should establish a good target costing team and include
employees from various functions, such as product development, product engineering, procurement, sales,
and cost control.
Organizational culture: The organizational culture should be open to continuous change and development.
Enterprises with effective target costing systems always renew themselves, without having to compromise on
their core values.
Use of other techniques: Use of certain techniques and practices may prove necessary in target costing. The
success of target costing will depend on the extent to which other techniques and methods have been
implemented. Methods that are considered key components of target costing include value engineering, cost
tables, value chain analysis, disassembly analysis, quality function deployment, balanced scorecard and
inspection analysis.
3. DATA AND SAMPLING:
Changing economic and social conditions of today have pushed enterprises in the furniture industry to carry
out production and sales activities in the face of tough competition. Therefore, they have started placing great
importance on cost management to maintain their presence in national and international markets, preserve
their competitive power, and reach their cost, time, quality and technology targets in a simultaneous manner
and at an optimal level. Within this scope, target costing is considered a significant costing tool. Target costing,
although it has been touched upon by a series of studies in Turkey since 1990s, lacks comprehensive
examination and discussion when it comes to its implementation. This study examines the extent to which
increasingly important target costing, which is used by many enterprises around the globe as a strategic cost
management process and profit planning tool, is implemented in one of the driving industries in Turkey, i.e.
the furniture industry. This study primarily intends to identify enterprises implementing target costing and
determine how they comply with the principles of implementation for target costing in processes such as cost
and price setting, customer analysis and cost reduction efforts. It also aims to lie down the reasons as to why
some enterprises do not implement target costing and to measure its usability in the future.
4. METHOD:
4.1. Data Collection Method and Analysis Used
Survey forms based on primary sources were used as the data collection tool for the purpose of this study.
Questions in the survey form, which was prepared to achieve the intended purpose of this study, were
determined taking the literature in Turkey and the world and former surveys conducted in different industries
into account.
4.2. Scope of the Research and Sampling
The population is composed of 39 leading furniture firms in Turkey affiliated with the Turkish Furniture
Industrialists’ Association. The main reason for selecting the members of the Turkish Furniture Industrialists’
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Association is their level of institutionalization in the industry and strong organizational structure, which is
required for implementation of sophisticated methods such as target costing. Information derived will
therefore be more consistent and reliable. As part of the survey, information was collected by e-mail and one-
on-one interviews with some enterprises. Only 14, though, replied to the questions in the survey.
5. ANALYSIS AND RESULTS
Respondents were asked questions on key principles and features of target costing, as well as the level of its
implementation at their own enterprises. In addition to evaluating how the method is implemented at
enterprises, questions that were associated with the features of the method were aimed at examining how
closely they stood to the principles of the method in practice. Respondents’ positions within those enterprises
are outlined in Table 1.
Table 1: Respondents’ Positions at Their Own Enterprises
Looking at respondents’ positions, four are senior executives (28.6%), four in charge of the production
department (28.6%), two in charge of accounting and finance (14.3%), two in charge of the factory (14.3%), and
two in charge of their relevant departments (%14.3). Operating periods of enterprises in the furniture industry
are outlined in Table 2:
Table 2: Enterprise Operating Period in the Furniture Industry
Years
N (Number)
Percentage (%)
Less than 3 years
0
0
3-5 years
0
0
5-10 years
3
21.4
10-20 years
7
50.0
20 years and above
4
28.6
TOTAL
14
100.0
Looking at enterprises’ operating period in the industry, 21.4% have been in the industry for 5-10 years, 50%
for 10-20 years, and 28.6% for more than 20 years. Figures reveal that the majority of the enterprises that
responded to the survey have sufficient experience in the industry in which they operate. Table 3 outlines the
target markets of the enterprises:
Table 3: Enterprise Target Market
Target Market
N (Number)
Percentage (%)
Domestic
5
35.7
International
0
0
Both domestic and international
9
64.3
TOTAL
14
100.0
A look into enterprises’ target markets shows that 35.7% operate only in the domestic market, whereas 64.3%
operate both in domestic and international markets. Tough competition in domestic and international markets
pushes enterprises to be more careful about costs. Therefore, one could say that enterprises with operations
both in domestic and international markets should pay more attention to costs. The following table
summarizes the factors enterprises think are important for competitive advantage.
Position
N (Number)
Percentage (%)
Senior Executive
4
28.6
Officer in Charge of Production Department
4
28.6
Accounting, Finance
2
14.3
Factory responsible
2
14.3
Department officer
2
14.3
TOTAL
14
100.0
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Table 4: Important Factors for Competitive Advantage
Factors
Most Important
Very
Important
Important
Less
Important
Unimportant
N
%
N
%
N
%
N
%
N
%
Production
2
14.3
12
85.7
0
0
0
0
0
0
Costs
14
100
0
0
0
0
0
0
0
0
Quality
8
57.1
6
42.9
0
0
0
0
0
0
Speed
1
7.1
8
57.1
5
35.7
0
0
0
0
Design
4
28.6
6
42.9
4
28.6
0
0
0
0
Cost was observed to be the most important factor with a percentile of 100%. Cost is important to gain
competitive advantage for enterprises in the furniture industry. However, competitive advantage is not only
achieved with cost looking at today’s conditions. Enterprises should place importance on other factors, as well.
The second most important factor is quality, according to the table. This has shown that enterprises pay
attention to the quality of the products they offer to consumers.
The third important factor is design. This emphasis on design creates a positive impact in terms of the level of
target costing implementation. One of the key elements of target costing is conducting market analysis.
Respondents were asked whether they conduct market analysis, as shown in the results provided in the
following table.
Table 5: Level of Market Analysis Implementation
Market Analysis
N
%
Sufficient
9
64.3
Partially
4
28.6
Never conduct
1
7.1
Total
14
100.0
Nine enterprises (64.3%) said they conducted sufficient analyses, four said they conducted partial analyses
(28.6%), and one said they never conduct analyses (7.1%), as per the evaluation on whether enterprises conduct
market/product analyses before producing a new product. With market analysis, enterprises identify
customers’ requests and needs and shape production activities accordingly, as part of target costing. 64.3% of
the respondents as cited above are anticipated to be seeing its positive reflection on the level of target costing
implementation.
Enterprises were also asked about the factors they researched in market analyses, as summarized in Table 6.
Table 6: Factors Researched in Market Analysis Before Production
Factors
Always
Usually
Sometimes
Rarely
Never
N
%
N
%
N
%
N
%
N
%
Customers’ product-related
preferences and expectations
8 57.1 4 28.6 2 14.3
0
0
0
0
Price customer anticipates for
the product
7 50.0 4 28.6 2 14.3 1 7.1
0
0
Potential sales volume of the
product
2 14.3 6 42.9 6 42.9
0
0
0
0
Knowledge on competitors’
products
1 7.1 3 21.4 8 57.1 2 14.3
0
0
According to Table 6, customer preferences and expectations is the first factor enterprises seek to understand
in market analysis. The second important factor is the price customers anticipate for a given product. This
shows that enterprises make sure to consider customer preferences and expectations and the price anticipated
by the consumer, both of which are key elements for target costing. This situation is also in a position to
support target costing. Cost estimation is another important factor in target costing. Following are the replies
to the question “In which stages do you make cost estimates while developing a new product?”
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Table 7: Stages in which cost estimates are made
Stages
Yes
Do not know
No
N
%
N
%
N
%
After a new product idea is conceived
8
57.1
5
35.7
1
7.1
During new product design
11
78.6
3
21.4
0
0
After production for the new product starts
12
85.7
0
0
2
14.3
After production is completed
12
85.7
0
0
2
14.3
We do not make cost estimates in any stage.
2
14.3
1
7.1
11
78.6
57.1% of enterprises stated they make cost estimates after the idea of a new product is conceived. 78.6% stated
they make cost estimates during new product design, while 85.7% said they make cost estimates after
production for the new product starts. 14.3% do not make cost estimates in any stage. As for target costing,
the cost of a product is determined in product design and development. 78.6% shows that the majority comply
with this principle. Respondents were asked whether they undertake any cost reduction efforts for new and
existing products at their enterprises. Seven said they exert sufficient level of efforts (50%), six said their efforts
were partial (42.9%) and one said they do not undertake any efforts (7.1%). When asked the stage in which
cost reduction efforts were undertaken, respondents replied as follows.
Table 8: Stages in which Cost Reduction Efforts are Undertaken
Stages
N
%
In design, before production
1
7.1
During production
6
42.9
After production is completed
0
0
In each phase of product life-cycle
7
50.0
Total
14
100
42.9% stated they carry out cost reduction activities at the stage of production, while 50% undertake cost
reduction efforts in each phase of the product life-cycle. 7.1% of enterprises carry out cost reduction activities
at the design stage before production. Cost reduction activities should be conducted in every phase of product
life-cycle for effective implementation of target costing. However, enterprises undertaking such efforts in
production should try to reduce this rate. As for competitive advantage, the product may lose some of its
competitive edge due to high market price, considering the fact that cost reduction efforts made in production
sometimes can never be interfered with.
Respondents were asked on the departments in charge of cost reduction activities, and the results are outlined
in Table 9.
Table 9: Departments in Charge of Cost Reduction Activities
Departments
Sufficiently
Responsible
Partially
Responsible
Not Responsible
N
%
N
%
N
%
Supply
10
71.4
4
28.6
0
0
Production
11
78.6
3
21.4
0
0
Design and production engineering
6
42.9
7
50.0
1
7.1
Accounting
8
57.1
4
28.6
2
14.3
Production departments assume the greatest responsibility in cost reduction activities with 78.6%, as revealed
by the table above. This is followed by supply and accounting departments with 71.4% and 57.1% respectively.
However, all functions are recommended to take part in cost reduction activities in target costing. More
responsibility should be assigned to design and production engineering departments. It is important to
include the members within a value chain in new product development processes and make sure they work
towards a share goal. Suppliers are one of them. Respondents were asked whether suppliers were included in
new product development processes, and the results are provided in Table 10.
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Table 10: Suppliers’ Level of Participation in New Product Development
Participation
N
%
Sufficiently
5
35.7
Partially
9
64.3
We do not include them
0
0
According to Table 10, 35.7% said suppliers’ participation is sufficient and 64.3 said it is partial. As a member
of the value chain, suppliers should be involved in product development processes in target costing. It is
therefore essential for enterprises to give suppliers more chance to take part in those processes. Regarding
dealers, who are also among the members of the value chain, respondents were asked whether they interact
with dealers before product design. Results are shown in Table 11.
Table 11: Level of Interaction with Dealers
Dealers
N
%
Sufficiently
8
57.1
Partially
5
35.7
We do not interact
1
7.1
Total
14
100.0
Respondents were asked whether they interact with dealers before development of a new product. Eight said
they did sufficiently (57.1%), five partially (35.7%), and one stated they did not interact (7.1%). Dealers are also
part of the value chain, and it would therefore be useful to take their opinion into account especially before
product design to help shape the design. It would serve as a guiding light to have a better understanding of
customers’ needs.
Target costing is based on the idea that the price is determined by the market. Thus, respondents were asked
how they set the selling price of a new product.
Table 12: Setting Selling Price
Way of Setting Price
N (Number)
Percentage (%)
Adding a certain profit margin on costs
5
35.7
According to the price set by competition
2
14.3
Through market research
5
35.7
Looking at the price of similar products
2
14.3
TOTAL
14
100.0
When asked how they set the selling price of a new product, 35.7% of enterprises said they added a certain
profit margin on costs, 14.3% determined the price according to the one set by competition, 35.7% set through
market research, and 14.3% looked into the price of similar products. Setting the price by adding a certain
profit margin on costs is a traditional method (cost + profit). 35.7% of enterprises continue to follow this
method. An equal number of enterprises, on the other hand, stated they set the selling price through market
research, which shows that they comply with the core principle of target costing, i.e. “the price is determined
in the market.” Respondents were also asked if they implemented target costing at their enterprises. Results
are provided in Table 13.
Table 13: Use of Target Costing
When asked if they implement the method of target costing at their enterprises, 14.3% of the respondents said
they did not implement it, 57.1% implemented it, and 28.6% planned to implement in the future. This
breakdown reveals that target costing is implemented in the furniture industry, and those enterprises without
Use of Target Costing
N (Number)
Percentage (%)
Do not implement target costing
2
14.3
Implement target costing
8
57.1
Plan to implement in the future
4
28.6
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any implementation of target costing could plan implementation in the future. Enterprises not implementing
target costing were inquired as to why they did not implement it, and the following results were obtained.
Lack of sufficient knowledge on target costing was observed to be the key reason for not implementing the
method. The second important reason was “failure to get support from the senior management”, while the
third reason was “lack of cross-functional cooperation”. In an attempt to determine the success of target
costing, respondents were asked the extent to which they agreed with the following statements as a result of
target costing, if they implemented it.
Table 14: The Success of Target Costing
Factors
Strongly
Agree
Agree
Not Certain
Disagree
Strongly
Disagree
N
%
N
%
N
%
N
%
N
%
New product costs
dropped before
production.
3 21.4 5 35.7 0 0
0
0
0
0
Customer expectations
for our products
fulfilled
6 42.9 2 14.3 0 0 0 0 0 0
Production costs
dropped
2 14.3 5 35.7 1 7.1
0
0
0
0
Total profitability
increased
0 0 8 57.1 0 0 0 0
0
0
Costs of raw materials,
materials, parts and
components
procured by suppliers
dropped
1 7.1 4 28.6 3 21.4 0 0 0 0
Providing product
features and functions
expected by customers
became easier
0 0 6 42.9 2 14.3 0 0 0 0
Number of changes to
design required after
production dropped
0 0 2 14.3 5 35.7 1 7.1 0 0
Cross-functional
cooperation improved
0 0 5 35.7 3 21.4 0 0 0 0
Wholesalers’ and
retailers’ impact on
design grew
3 21.4 3 21.4 2 14.3 0 0 0 0
35.7% of the respondents agreed and 21.4% strongly agreed new product costs dropped before production.
42.9% said they strongly agreed and 14.3% agreed customer expectations for products were fulfilled. 35.7% of
the enterprises agreed production costs dropped. 57.1% agreed total profitability increased, while 28.6% said
they agreed costs of raw materials, materials, parts and components from suppliers dropped. 42.9% agreed
providing product features and functions expected by customers became easier, whereas 14.3% said they were
uncertain with this statement. “Number of changes to design required after production dropped” garnered
14.3% “agree” replies and 35.7% “not certain” replies. 35.7% agreed cross-functional cooperation increased,
whereas 21.4% said they were not certain. 21.4% strongly agreed, 21.4% agreed and 14.3% said they were
uncertain with the fact that wholesalers’ and retailers’ impact on design grew.
5. CONCLUSION AND SUGGESTIONS
Target costing helps determine the cost by subtracting the desired profit margin from the market price set
according to market research results. Applied throughout the design stage of a product, target costing
primarily addresses the issue of closing the gap between the target cost and the cost enterprises attain with
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their own means. A significant portion of costs can be determined in design stage; therefore, cost reduction
efforts should be undertaken in design to close this gap, by taking customer requirements and needs into
account and not compromising on quality. This study involves a survey of 14 enterprises registered at the
Turkish Furniture Industrialists’ Association to determine whether target costing is implemented and its
principles are followed by enterprises even if they do not implement the method.
Enterprises should pay attention to quality, speed, timing, and first and foremost, costs, considering the fact
that they operate in highly competitive environments. Enterprises point to costs as the most important factor
in achieving competitive advantage. That is why they should place emphasis on cost reduction efforts, for
which target costing is deemed feasible. Besides costs, quality and design seem to have an impact on
enterprises’ competitiveness. Design was stated as the most important leverage in competition after cost and
quality. More attention should be paid to design, since customer requests shape the furniture industry.
Enterprises are observed to find out customer expectations through regular market research and feedback
from suppliers and retailers during product design. This increases the level of target costing implementation.
In target costing, customer expectations should be identified especially before product design and market
research covering suppliers and retailers should be conducted in design phase. For enterprises to implement
target costing, they need the assistance of other stakeholders within the value chain. Enterprises who
participated in the survey could be said that they partially got assistance from those stakeholders. However,
engagement and involvement of the members within the value chain should be enhanced. To achieve
effectiveness, enterprises should leverage more on design and production engineering departments, which
correspond to the most important part of target costing. This means that a broad participation and
engagement with internal and external parties is required for enterprises to reach the target cost.
Majority of the enterprises in the furniture industry are observed to be employing traditional cost management
systems in setting the selling price. Enterprises should leave traditional methods behind and opt for the
methods of target costing including market research to provide products at the selling price that is desired by
the customers.
Respondents were observed to have knowledge on target costing, with the majority of them implementing the
method. They, however, applied only the key principles required by the implementation of target costing.
Enterprises not implementing the method expressed their willingness to do so in the future. This serves as
significant data showing that target costing will be more frequently used in the future. For enterprises not
implementing the method, target costing could be successfully implemented once a certain understanding of
the method is acquired, support from the senior management is guaranteed and cross-functional cooperation
is increased.
Enterprises implementing the method could be said to implement it properly. However, the method will prove
more successful if the following principles are followed in a more careful and controlled manner:
1. Taking the price desired by customers and set by the market into account while determining the selling
price of a new product;
2. Making cost estimates during design and before production, and undertaking cost reduction efforts
throughout the entire product life-cycle;
3. Identifying customer expectations at the design phase through regular market research; and
4. Including internal and external stakeholders of the value chain in the method.
As a conclusion, majority of the enterprises implementing target costing stated it helped address customer
requirements and reduce costs. They will be able to utilize the method as a significant tool for competitive
advantage if they follow aforementioned principles more diligently. Enterprises not implementing it, on the
other hand, are observed to be internally following the principles of the method in general terms. Its
implementation will be successful if the senior management assumes an active role for its organization-wide
ownership.
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