By Mostafa Al-Qady, Said El-Helbawy
Target costing is a system of profit planning and cost management that ensures the new competitive product produced by the firm meets customer desires for price, features and functionality, and other subjective factors, while maintaining the firm’s required financial return. Accordingly, target costing requires cost information that has ability to assist in managing costs for future products. While target costing provides an effective tool for generating plans and managing resources, it requires an improved method for determining and controlling costs.
This paper proposes integrating resource consumption accounting (RCA) with target costing to improve the target costing process. Target costing has the ability to work in a feed forward mode in the design stage, while RCA can be run in reverse to assess the future demand on resource pools’ output. The integration of target costing and RCA would help determine estimated costs more accurately, provide cost structures of design alternatives, and thus achieve the target cost.
Integrating Target Costing and Resource Consumption Accounting