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Introduction

In todays global business environment, the major constituents are the high level of competition worldwide, swift automation of production and another process through advancement in computer technology and production techniques, increased regulatory measures being taken by the governments in different regions with respect to environment and health issues. Moreover, a consistent rise in the awareness of the products and their quality among the customers, and competitive pricing of the products is also viewed as another major constituent. In such a situation, an organization has to be smart enough to produce commercially viable products which are at the same time in compliance with the needs and requirements of the customers. Along with this the offering of products at a price that is acceptable in the market also serves as a success factor for the organizations. In order to achieve this, organizations are required to uplift their efficiency levels in every aspect and process (Clifton 2003). If such improvement in the efficiency levels is not introduced, the costs of the products being produced by the company may rise above the costs of the products being manufactured by the competitors in the market and it may become very difficult to cover these increased or high levels of costs through increased sales price of the product and generate a respectable sales volume. It can be observed that there have been significant developments in relation to managerial accounting in the last two decades which have principally taken place due to increased competitive business environment all over the world (Bonzemba and Okano 1998, Ansari and Bell 2009). Today there are a number of management techniques and options available to the organizations for improving efficiency levels in the production cycle of the organizations which include:

Activity Based Costing (ABC);
Activity Based Management (ABM);
Total Quality Management (TQM);
Target Costing Management (TCM);
Life Cycle Costing;
Balanced Scorecards; etc. (Bonzemba and Okano 1998)

The emergence of these management tools and techniques has developed a new branch of managerial accounting which is known as Strategic Cost Management. Equipped with the objective of determining and exploiting advantage with respect to the competition prevailing in the market, strategic cost management is aimed at generating such piece of information for top-level management that allows them to take decisions in order to maintain or develop an environment in which the organization holds a competitive advantage in the market. Among the different tools and techniques offered by strategic cost management which is mentioned above is target costing. Target Costing is regarded as an approach to strengthening the competitive advantage of a company in the market while considering the global business environment. In contrast to the traditional approaches of cost management, target costing serves as an Open System which bridges the factors affecting the effective and efficient production of the products both within and outside the organization. The target costing technique of cost management considers four major factors, i.e. cost, quality, innovation, and time. According to this approach, the optimization of these identified factors is considered in the designing and developing stage of the product, which in turn involves the consideration of different stakeholders, namely the management of the organization, suppliers, and customers (Bonzemba and Okano 1998).

Background

The concept of target costing originated from Japan and was called Genkakikaku in the local language (Nicolini, et al. 2000, Monden and Hamada 1991). Since after its inception in the 60s, the concept gained wide recognition among different manufacturing concerns which include sectors like automobiles, electronic, electrical, and a number of other processes based sectors (Tani, Okano, and Shimizu, et al. 1994; Okano 1995; Tanaka 1989; Tanaka 1993). Target costing came to the limelight in the English literature for managerial accounting in the 90s (Cooper 1995, Kato 1993). Target costing is also referred to as cost planning, cost projection systems (Kato 1993), basic net price, manufacturing cost reduction, pre-calculation, direct cost feasibility study (Dekker and Smidt 2003), design to cost (Michaels and Wood 1989), and cost management (Cooper and Slagmulder 2004). Target costing places its focus on the long-term management of costs. There are a number of advantages which are associated with the application and usage of target costing, these advantages include:

Proactive approach towards managing costs;
Directing business entities to customers;
Removing obstacles between different departments within an organization;
Improving awareness level among employees;
Increasing cooperation between an organization and its suppliers;
Reducing occurrence of those activities or processes which do not add any value;
Offering range of options to select the one which is best suited; and
Reduction in time required to make delivery in the market (Yazdifar and Askarany 2009).

On the other hand, there are some limitations or disadvantages also which are often associated with the use of target costing. These disadvantages include:

Highly detailed level of cost relating information is required for the effective implementation of target costing;
It is not possible to express all factors present in the information in a quantified manner;
In the initial stages of implementation of target costing technique, there may be significant costs;
High level of cooperation is required at different organizational levels;
Since designing and implementation of the target costing scheme is carried out by different people; it is possible that there may be differences in theory and practice; and
As it is the aim of the target costing technique to set a targeted production and profit before the initiation of any process, the practical application of the technique may sometimes result in inefficient production and also result in intentional compromises in the quality of the product being manufactured with the objective of attaining the goals set already (Yazdifar and Askarany 2009, Helms, et al. 2005).

Target Costing is defined as a systematic process for the management of the cost related to a product when the product is in its designing stage. This management of cost involves the establishment of the selling price of that product in the market the and establishment of the required profit level. Moreover, the process also allows the management to attain these objectives by lowerown the cost of the product under consideration without affecting the expectations of the customers while considering the available options for the purposes of reducing costs in the initial stages of a proct development. In other words, target costing has two major concepts, i.e. determining the cost (target cost) and attaining the cost determined. It is argued that the major area of concern while applying the concept of target costing is the setting of target itself (Nicolini, et al. 2000). Whereas, Monden (1995) perceives two important aims of the target costing which are reduction of the cost of the product under consideration with the objective that the targeted profit set for the product is attained while no compromise on the quality of the product, production time and market price is made and secondly, the employees are all motivated towards achieving the profit set in the target costing process of the product.

Goals of Target Costing

Target costing is regarded as a system for managing cost, which suggests that reducing cost of a product is an important task for the management. But, as discussed above, the development and designing stage of a product consists of different and often opposing objectives, as for instance, lowering down the cost of a product, maintaining high level of quality, guaranteeing satisfaction to the customers with respect to the product and in time production, and delivery of the product to the market (Cooper 1995, McMann and Nanni Jr. 1995). In such a situation, target costing allows the designers and developers of a new product to make choices and trade-offs between the available options, that is to say, one may have to forgo quality if the cost is to reduced and quick production is required. Target costing assists the managers and developers of the products to determine the worth the product has in its market and the maximum amount of money people may spent on the new product. It is also suggested that the main objectives of the application of the concept of target costing is to make sure that there are no products under production which do not realize a respectable amount of profit to the organization and to develop a suitable choice or trade-off between cost, functionality and quality (Cooper and Slagmulder 2004).

Once target cost for a product is set, a number of available techniques may be applied to manage the selection or trade-offs among the different set of goals in the designing phase of the product development, i.e. by means of Value Engineering (VE), Quality Function Development (QFD), and Design For Manufacturing and Assembly (DFMA). These choices between different objectives and areas of management during the product life cycle result in a decisive situation for the organizations to determine as to which options are likely to result in a favorable situation for the organization once adopted under the target costing technique of management and after adopting such techniques what is the actual extent to which the opted goals are in fact achieved. Tani, et al (1994) conclude in their study of Japanese firms that the Japanese manufacturing entities regarded the lowering down of costs as the most important objective when applying target costing management. This objective was then followed by attaining quality, satiating the needs, and requirements of the customers and producing and delivering the products being manufactured in time in the market (T. Tani, H. Okano and N. Shimizu, et al. 1994). On the other hand, Horvath and Tani (1997) during their study of comparing the target costing management between Japanese and German companies found that among the selected German companies, target costing management technique was applied with the primary motive of reducing costs. This motive was then followed by market oriented product development, lead time reduction for product development, and high quality (Horvath and Tani 1997, R. Cooper 1997).

Empirical Evidence of Adoption of Target costing

Upon reviewing the past literature on the subject of target costing, it is often revealed that the concept of target costing is related to Japanese companies and the empirical evidence from the researches has mainly come from Japanese based researchers who primarily researched under the Japanese context. On the other hand, researchers from the Western countries focused on the application of target costing in different Western countries. According to Lorino (1995), more than 80 percent of the Japanese firms (related to assembly industries) have adopted total costing. In the US, a combine investigation as to the level of application of target costing at organization level was carried out by E&Y (Ernst & Young) and IMA (The Institute of Management Accountants) in which it was found that about 26 percent of the members of the Institute applied target costing (Ernst & Young LLP 2003). Similarly, a study of Australian firms which related to the manufacturing sector revealed that out of the total 78 companies selected, 38 percent were following the concept of target costing (Chenhall and Langfield-Smith 1998). On the other hand, Dekker and Smidt (2003) carried out a study in which they focused on identifying the level of adoption of target costing in corporate entities based in Netherlands and had their securities listed on the ASE (Amsterdam Stock Exchange). It was found that a very high percentage, i.e. 59.4% of the companies selected used target costing (Dekker and Smidt 2003). In the research work of Israelsen, et al. (1996) which focused on companies operating in Denmark, it was found that 50% of the companies selected in the study had introduced target costing in their businesses (Israelsen, et al. 1996).

Importance of Target Costing

The importance of adopting and applying the concept of target costing has varied across different regions. In New Zealand, the United Kingdom and the United States of America there has been observed a moderate trend in the adoption of target costing (Guilding, Cravens and Tayles 2000; Rattray, Lord and Shanahan 2007). Japanese companies viewed target costing as the most important component for managing their business or manufacturing processes (Wijewardena and De Zoysa 1999). Another study reported that out of a sample comprising 180 listed Japanese business entities 60.6 percent entities applied target costing one way or the other (Tani, et al. 1994). On the other hand, in case of the Australian companies it was found that the priority level set by the organizations under consideration gave target costing the 10^th position in their hierarchy of importance among eleven managerial activities (Wijewardena and De Zoysa 1999; Collini, Cuel and Fabrello 2005).

Different Budgeting Systems

There are a number of budgeting techniques applied and used in the modern business organizations all over the world. Out of all the budgeting systems following are the major approaches which are commonly applied:

Envelope Budgeting

Envelope Budgeting is the simplest form of budgeting technique and is famous for the ability to visualize and maintain budgets. Under this system of budgeting, the cash required to meet specific expenditures is kept or stored in distinct envelopes; this practice gives it the name of envelope budgeting. The simplicity of this budgeting method is in itself the biggest advantage of using it. However, there are some limitations also that are often associated with envelop budgeting which include inability under envelope budgeting to tackle situations of emergency which require huge amount of cash reserves. Sometimes it may become impractical to carry out envelope budgeting for each class of items (Fiscal Geek 2011).

Incremental Budgeting

Incremental budgeting approach is regarded as one of the most commonly used budgeting technique. Under this approach of budgeting budgets are made for the current or upcoming period on the basis of information related to actual outcomes of the same processes in the previous time period of the same length. Under this approach, the budgeting for future periods also encompasses the increase and decrease in the cost elements for the period for which budget is being prepared. In this approach, it is possible to determine the percent change in every items cost included in the budget. But there are particular items of expenditure which cannot be handled in this manner (Economy Watch 2010).

Incremental budgeting is easily understood and the calculations on which the whole budgeting process is based are simple and easy without any complicated steps involved. The budgets prepared under this approach are stable as compared to the budgets prepared under any other method or approach. As a result of this stability, it is easy to take decisions on the basis of mere predictions and expectations. Apart from these advantages, the model also has some inherent limitations associated with it. As for instance, under incremental budgeting approach, budgets are prepared while keeping in view the previous patterns of costs and expenditures, it is possible that in future periods for which budgets are being prepared, significant changes may take place which as a result affect the budgeted figures (NCVO 2011).

Zero Based Budgeting

Zero Based Budgeting is a system of budgeting which aims to plan and assist in decision making. As found in the incremental budgeting approach, managers are charged with the responsibility of justifying the occurrence of variances in the existing production period as against the previous periods. In contrast to this approach, zero based budgeting requires each cost component of the budget to be reviewed rather than mere consideration of variations. In this process of reviewing, the previous figures related to expenditures are not taken into account. For the purposes of zero based budgeting, whole budgeted plans are brought under consideration which starts from zero bases. This approach allows independent reviewing of each component of the cost without having regard to particular trends whether increasing or decreasing (CIPFA 2006).

Priority Based Budgeting

Priority based budgeting is actually a modified version of the Zero Based Budgeting. Under this budgetary model consideration is given to the priorities of the top level management. Upon the basis of priorities set, budgets are prepared which is also accompanied by a continuous review of the performance of different departments and their services. The analysis includes the reviewing of objectives of the services provided by the department under consideration, the aims behind the services of the department and the level and extent up to which the services can be provided by the department. Upon reviewing these factors, the priority levels for different services are set and presented to those who are responsible for the decision making processes (Aberdeen City Council 2010; Northern Ireland Assembly 2011; Kavanagh, Johnson and Fabian 2010).

Performance Based Budgeting

Performance based budgeting is based on connecting information related to performance with the management of available resources. In order to plan budgets under this approach, there are certain information items which are required to be available (Hager and Hobson 2001). These include:

Monetary measures of the inputs required for production;
Quantity requirements of the outputs;
Cost data related to each level of activity and
Information showing the extent to which objectives are achieved.

Like zero based budgeting, performance based budgeting is also required to be adopted during the policy making and setting up o objectives of the organization with respect to production plans. After doing so, it is the turn of the line managers to establish such performance measurement checks which are aimed at reviewing the attainment of the set targets (Northern Ireland Assembly 2011).

Resource Restricting Budgeting

This budgeting technique is same as cash limited budgeting. In Resource Restricting Budgeting, there are certain limits placed on specific resources for instance, labor or equipment. In fact, this method of budgeting operates in a similar way to the incremental budgeting but in a reverse manner. The process of budgeting starts by considering supply first and it is presumed that the supply will remain constant thus making it a limiting factor. Keeping in view this limiting factor, reverse budgeting takes place (Northern Ireland Assembly 2011). According to the Chartered Institute of Public Finance and Accountancy (CIPFA), the process offers control over resources in question and provides clear unambiguous direction but tends to ignore the practicalities of service delivery and may make the service unmanageable because of the restrictions imposed (CIPFA 2009).

Programme Budgeting

In contrast to the traditional budgeting approaches, programme budgeting is a budgeting system which offers a very detailed overview of the costs of each plan which is to be included in a budget. Targets, production and the expectations are all included in the programme budgeting in terms of their respective raw materials, labor and other related expenses. Adding up all the activities identified under this method result in a Programme Budget. Therefore, upon reviewing a Programme Budget, it is easy and simple to identify that what is expected to be produced, what is the expected cost and what will be the result of doing so (Urban Institute 2001).

These budgeting techniques or systems are all applied in the business world of today but there significance and importance varies depending upon the features and characteristics, approaches they adopt in estimating the future costs and profits. While comparing these techniques of budgeting with the target costing approach, it is revealed that the target costing along with the estimation of future relationship between costs and profitability of the products has something different to offer, which includes the early estimation of costs at designing stage of the product development and the possibility of simultaneous adjustment of increase in costs which are most of the time unforeseen (Northern Ireland Assembly 2011; Ellram 1999).

Findings and Discussion

Target costing allows organizations to manage their costs before the execution of the production cycle. It is claimed that approximately 80% of the cost are identified before the start of the production process, i.e. in the designing process of the product and the remaining cost incurs later in the production stage. Apart from this, target costing enables the organizations to manage costs and time of production in a collective manner with the help of a predefined framework, which is established at the designing stage. One other major benefit of target costing is that it allows the designing and production processes to coexist. Moreover, the target costing approach adopts a market based approach in determining costs. In this way, not only the needs of the customers are taken into account but also the amount they are willing to pay for the product is determined. Following this planning technique allows the decision makers to devote their attention on such costs which are deemed to be creating value and meeting the demands and requirements of the customers. Furthermore, by taking into consideration the preferences of the customers, target costing enables the managers to make choices among the products characteristics, costs and design, which ultimately results in the manufacturing of such products which are best suited to needs and requirements of the market.

In the study named, A survey of the adoption and use of target costing in Dutch firms conducted by Dekker and Smidt (2003), the researchers concluded that during the process of product development, a number of objectives were targeted to be achieved at the same time and in this regard, target costing approach proved to be the ideal choice. In the view of authors, the primary objectives which are pursued by the entities are realization of high product quality, customer satisfaction by developing products that fulfill their needs, fast product introduction and low cost (Dekker and Smidt 2003). The researchers in their work initially measured the level of importance which was given to these goals and objectives by the companies under consideration in the research work, as this would allow developing an understanding as to what are the perceived benefits of target costing as seen by the organizations. After measuring the degree of importance, the researchers focused on measuring the degree to which organizations were able to realize benefits associated with the objectives mentioned above (Dekker and Smidt 2003). Both the measurements were carried out on the basis of Seven Point Likert Scale in which 1 noted unimportant and 7 noted very important. On the basis of past literature and the trends of the organizations with respect to the view of importance for each of the identified goals, it was expected that reducing costs would be the most important motivator or factor in opting for the target costing method as it allows the organizations to market only those items which are expected to earn profit while a specified level of costs is maintained (Dekker and Smidt 2003). On the other hand, there were no expectations developed regarding the importance levels for the remaining three objectives. The results of the research showed that the expectation developed held true as the companies under observation regarded the reduction of cost to be the most important aim while applying target costing (Dekker and Smidt 2003).

Considering the concepts and working of different budgeting techniques as discussed earlier in this report, it can be stated that target costing is beneficial and helpful for the organizations in attaining their desired level of profits and costs for the products which ensures the success of their strategic planning related to production activities. This becomes possible by means of determining the significant portions of costs involved in the production process at very early stage, i.e. at the designing stage of the product. Thus, targeted profits are set and costs to be incurred are known prior to the initiation of the production process. Moreover, target costing is seen to be very distinct in the sense that it offers the organizations to carry out simultaneous processes, i.e. designing and production. This attribute of target costing which is not present in any of the budgeting systems presented above allows the organizations applying target costing to be flexible in their operational activities by way of enabling them to adjust their production styles and techniques on the basis of available data. In addition to this, target costing presents an indirect benefit to the organizations which are applying it by way of developing understanding between the organizations and their customers. This becomes possible as the target costing approach allows the managers of an organization to develop such a strategy and design for the product which is best suited to the customers. As for instance, the needs and requirements of the customers are considered by the organizations while designing the product and such features and characteristics are added in the products which are required by the customers. This allows the organizations to reduce or eliminate those costs which incur due to the addition of such features in the products which are no more required by the customers. This brings efficiency in the production process and the customers are also satisfied in this way. The relationship between the customers and the organization gets even stronger when organizations take into consideration the exact demands and requirements of the customers while producing the products (SIKON 2010).

Apart from the benefits or advantages mentioned in the above paragraphs, there are certain disadvantages also which are associated with the application of target costing approach. The foremost problem or disadvantage associated with the target costing approach is that it requires a huge amount of detailed data. This requirement suggests that the data pertaining to each activity in the production process is required to be considered, and it is a very lengthy process to be carried out. In addition to this, there is a huge level of coordination required in the organization to manage production process under target costing approach. The target costing also has a significant limitation associated with it in relation to the dropping down of the quality of the product being manufactured. As for instance, once the cost and profitability of a product is determined, it becomes impossible for the production team to divert from that and if any increase in costs results due to any change in the circumstances, such increase has to adjusted somewhere in the production process. In such cases, the most readily available solution for disposing of the increased costs is to use materials of low quality and continue with the production of the products without any interpretation in the product cycle (Willems 2002).

Conclusion and Recommendations

Considering this discussion and the review of past studies presented earlier in the report, it can be stated that the concept of target costing undoubtedly benefits the organizations. Apart from few instances of low importance given to the adoption of the target costing, the general trends are suggestive of the fact that organizations in most of the cases are seen as very keen to adopt the target costing approach. Moreover, the review of studies presented in this report also suggests that the companies for which researches have been carried out use costing approaches conforming to the target costing techniques. There are various other budgeting systems which can be used in forecasting the amount of cost that is to incur in the future periods but target costing differs from them by estimating future relationships between costs and profitability of the products and as a result it has something different to offer. These could include the early estimation of costs at the designing stage of the product development and the possibility of simultaneous adjustment of the increase in costs which are most of the time unforeseen.

The application of the concept of target costing allows organizations to benefit in several ways which include 1) following a proactive approach, 2) directing business entities to customers, 3) removing obstacles between different departments within an organization, improving awareness level among employees, 4) increasing cooperation between organization and its suppliers, 5) reducing occurrence of those activities or processes which do not add any value, 6) offering range of options to select the one which is best suited, and 7) reduction in time required to make delivery in the market, etc. On the other hand, there are some disadvantages also which are associated with following target costing approach. These disadvantages or limitations include 1) the need for highly detailed level of cost related information which is required for the effective implementation of target costing, 2) impossibility of expressing all factors present in the information in a quantified manner in the initial stages of implementation of target costing technique, 3) there may be significant costs, high level of cooperation is required at different organizational levels which may sometimes be impossible for organizations, 4) since designing and implementation of the target costing scheme is carried out by different people therefore it is possible that there may be differences in theory and practice, 5) as it is the aim of target costing technique to set a targeted production and profit before the initiation of any process therefore the practical application of the technique may sometimes result in inefficient production and 6) also result in intentional compromises in the quality of the product being manufactured with the objective of attaining the goals set by target costing, etc. Considering these benefits and limitations of the target costing concept, it can be said that the target costing has a major role to play in making companies focus on profitability and the product in an integrated strategy.

The studies which have been considered in this report do not offer any insight to the nature and details of the costing techniques applied by the organizations under o

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