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Procedia Economics and Finance 23 (2015) 1195 – 1200

2nd GLOBAL CONFERENCE on BUSINESS, ECONOMICS, MANAGEMENT and

TOURISM, 30-31 October 2014, Prague, Czech Republic

Target Costing Calculation and Economic Gain for Companies

Jaroslava Kádárová a*, Katarína Teplická b, Michaela Durkáþová a, Marek Vida c
a
Technical University of Košice, Faculty of Mechanical Engineering, Department of Industrial Engineering and Management,
Letná 9, 042 00 Košice, Slovakia
b
Technical University of Košice, Faculty of mining, ecology, process control and geotechnologie, Department of Business and Management,
Park Komenského 19, 042 00 Košice, Slovakia
c
Zeocem, a. s., 094 34 Bystré 282, Slovakia

Abstract

This paper deals about the problematic of target costing implementation into the managerial decisions. These decisions make
value analysis principles for increasing in competitiveness by the setting off limits for maximum allowable costs which should
not exceeded by company manufacturing. By this approach is possible to improve product quality, service, shortening the
research and development period and continual effort to lower costs. Target costing as a modern method of calculation uses the
principles of value analysis, by using instruments of functional cost analysis and quantitative-function deployment can provide a
functional differentiation of the product. This approach has a high importance for quality assurance in pre-production phase and
it’s increasing. Application of target costing is growing in praxis still. Target costing calculation introduce system approach to
quantify costs of product in the phase of constructive and development activities of production. Comparison target costing
calculation and traditional calculation show target gap. Target costing calculation is new modern instrument that it facilitates to
manage price of product by the customers’ requirements. The price is determined by market and customer’s needs. In this phase
is possible to fix costs of product. In praxis we often meet with situation where the price of product is very high and customer is
not ready to pay so much. Target costing calculation limits cost of production.
© 2015
© 2014 Published
The Authors. Published
by Elsevier B.V.byThis
Elsevier B.V. access article under the CC BY-NC-ND license
is an open
Selection and/ peer-review under responsibility of Academic World Research and Education Center.
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Selection and/ peer-review under responsibility of Academic World Research and Education Center
Keywords: Cost, target costing, value analysis, price, quality of product.

1. Introduction

The calculation of product is today very important and the calculation is necessary in term of customer requests
and customer needs. By the creation of calculation is important to accept quality of product and to value price of

* Jaroslava Kádárová. Tel.: +421-55-602-3242

E-mail address: jaroslava.kadarova@tuke.sk

2212-5671 © 2015 Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Selection and/ peer-review under responsibility of Academic World Research and Education Center
doi:10.1016/S2212-5671(15)00331-7
1196 Jaroslava Kádárová et al. / Procedia Economics and Finance 23 (2015) 1195 – 1200

product following the quality. Today customers influence price of product by specifications of product and
producers, businessmen must to adapt price of product to customer requirements. This reason is stimulus to change
creation of calculation and to use new modern methods of calculation for example activity based costing, target
costing, kaizen costing, job costing, and inventory costing and other. Utilization of these methods in companies in
manufacturing company brings some specifics. These methods produce better evidence of costs and price of product
but they are very difficult to introduce in praxis (Popesko, 2010). Integral part of calculation creation is knowledge
management that will be orientated to know everything about customer and needs of customers, market
specifications and possibilities how to be competitive, something about competition and her strategy in area of
calculation.
Target costing method demands to monitor market price and price of competitive. The price of product consists
of cost items that we must reduce. Direct and indirect costs will be reduced by using of new methods. Very
important part of price is profit. We must accept profit charge by the creation of calculation. Target costing
calculation is a part of value analysis that is a very important tool that can increase the competitiveness of outputs in
each branch of industry. Value analysis represents a systematic approach to evaluation of product characteristics that
enables to fix alternatives that can improve the product quality, defined as the proportion of its commercial
characteristics and costs.
Project aim: The main goal of this project is to present target costing calculation and its using in wood processing
industry by the creation of price calculation. We would like present advantages and disadvantages of this
calculation method in company and to compare this progressive method with classical method of cost calculation.

2. Research methodology

Target costing calculation also referred to as target oriented method of costing calculation has its origins in Japan.
In 1980’s it spread to our continent through American daughter companies in Western European countries. In
1990’s more than 80 % of engineering and electro technical industry companies in Japan used this method of
calculation (Tumpach, 2008). Target costing is not just a cost reduction technique or control framework but part of
the comprehensive strategic profit management system including value analysis and value engineering (Helms,
Ettkin, Baxter & Gordon, 2005).
The primary task is not to find out how much a product costs, but how much a product can cost so that it is
possible to be sold for a particular market price. Calculation as a pricing tool is in the areas of strong competition
therefore slowly losing its significance. Price is determined by the market and it is not possible to offer the product
at the market for a higher price. Thus companies have to manufacture products with such costs which can be
covered by the final price. Therefore it is important to plan costs not only in the manufacturing stage but at the initial
stages of the production performance. Production costs are influenced especially by its characteristics and
manufacturing methods. The difference between the traditional approach of the calculation and the target costing is
present on the figure 1.
Majority of performance costs are decided already in pre-manufacturing stages since there are already determined
such factors as technological progress and performance characteristics. It is proved that 85 to 90% of costs relating
to performance are the result of decision made in pre-manufacturing stages (Foltínová, et al., 2007). The basic idea
of target costing calculation is in setting the limits for maximum allowable costs which should not exceeded by
company manufacturing. This limit is untraditionally set on the basis of technical and economic standards of
tangible consumption but as the rest which remains from the product price minus the target required profit
(Foltínová, et al. (2007). Allowable costs are set by subtracting the target profit from the target price (Kádárová,
2011; Macík, 1999).
Allowable costs are compared with standard drifting costs and the final difference shows the necessary cut of
costs already at the product development stage.

Allowable costs = target price – target profit (1)

The base for using this method is the existence of relatively stable or beforehand expected market price (target
price). This price must reflect especially the value perceived by customers, characteristics, quality and competitive
 Jaroslava Kádárová et al. / Procedia Economics and Finance 23 (2015) 1195 – 1200 1197

or substitute performance price (Vetráková, et al., 2007). The price should be verified by marketing research which
should focus on target group of customers’ preferences (Kádárová, 2011).

COST TARGET
CALCULATION COSTING

Market analysis + basic parameters of the Market analysis on the base of customer
product preferences

Technical documentation Target price

(constructional documentation) (with Target profit)
Technological preparation (consumption
standards of work, materials, normative,
limits ...)
Organisational provision (production,
TARGET COSTING
storage, distribution, sales

PRICE = Direct and Technical, technological and organisational

overhead cost + profit preparation - optimalization of production

MANUFACTURING PROCESS

Fig. 1. Difference between the traditional approach of the calculation and the target costing

In real life it often happens that high production costs are not the result of the fact what the real customers’ needs
are but more what is supposed their needs will be. At target costing calculation it is therefore by means of marketing
research necessary to find out the customers’ requirements on performance and put them into balance with
performance parameters. Quantitative-function deployment (QFD) deals primarily with this analysis (Marešová,
2001).
On the other hand the functional cost analysis focuses on finding out any inconsistency between customers’
preferences and real costs. There is though a problem with stating customers’ qualified point of view on some of the
performance parameters since customers can express their requirements regarding the performance look and its
basic functions but not its individual parts.

3. Results of project - target costing calculation

In order to develop new PC desk Classic we provided the marketing analysis, which revealed that from the point
of view of potential customers the most important are the following functions listed also with the percentage:
enough storage space 35 %, spacious working space 30 %, modular principle 22 %, sliding bar keyboard 8 %, and
possibility of ergonomic adjustment 5 %. The price survey pointed out that an ideal initial market price would be
120 €. For the company is adequate return of cost on the level 10 %. After quantitative functional analysis of
customers’ requirements on function and its individual components were found the following facts (table 1).

Table 1. Qualitative-functional analysis of PC desk Classic

Functions Components
Corpus Work tops Doors and Connecting Mounts and legs
drawer materials
and forging
Storage space (35%) 12,25 % 3,50 % 15,75 % 3,50 % -
1198 Jaroslava Kádárová et al. / Procedia Economics and Finance 23 (2015) 1195 – 1200

Working Space (30%) 3,00 % 27,0 % - - -

Modular principle (22%) 6,60 % - 5,50 % 8,80 % 1,10 %
Sliding bar keyboard (8%) 1,60 % - 2,40 % 4,00 % -
Ergonomic adjustment (5%) 0,25 % - - - 4,75 %
Total 23,70% 30,50 % 23,65 % 16,30 % 5,85 %

Project task: It is necessary to set the level of target profit and overall allowable cost, allowable costs of
individual components and by the functional costs analysis determine the inconsistency between customers’
preferences and planned costs necessary for this furniture production.
Since we have no data concerning the level costs on individual PC desk furniture components we will set its level
according to customers’ preferences.
Results: At first it is necessary to set importance of individual components as the collation of importance scale of
individual customers’ preferences and percentage of assurance level of a particular preference by individual
components (Table 2).

Table 2. Setting the level of individual components importance

Components
Functions Doors and Connecting materials
Corpus Work tops Mounts and legs
drawer and forging
Storage space (35%) 35 % 10 % 45 % 10 % -
Working Space (30%) 10 % 90 % - - -
Modular principle (22%) 30 % - 25 % 40 % 5%
Sliding bar keyboard (8%) 20 % - 30 % 50 % -
Ergonomic adjustment (5%) 5% - - - 95 %

Target price Target profit Target costs

120 € 10,9 € 109,1 €

Corpus Work tops Doors and drawer Connecting materials and

forging
Target cost Target cost Target cost Mounts and legs
25,86 € 33,28 € 25,81 €
Target cost
17,79 €
6,36 €

Target costs = 109,1 €

Fig. 2. Target costing calculation for selected product

According to figure 2, the firm must produce the PC desk Classik in 109,10 € of production cost. Price of
customer is 120 € and the profit is 10,90 €. The firm needs to produce this product in 109,10 € because by the higher
cost the firm doesn’t obtain profit 10 %. Figure 3 presents price of product, profit, costs and costs for individual
components of product.
On the basis of functional costs analysis it is possible to state that when buying PC desks 35 % of customers are
interested in function of storage space and approximately another 52 % of customers consider as the most important
spacious of working space and modular principle of construction this product. We can also state, that in this case
this reflects the basic PC desk furniture functions and they count for 73,3 % of total level of the costs. Without this
function is basically non-functional product for customers.
 Jaroslava Kádárová et al. / Procedia Economics and Finance 23 (2015) 1195 – 1200 1199

4. Results of analysis and discussion

The result from the target costing should therefore reflect the improvement of those functions which are preferred
by 87 % of customers and at the same time it allows to lower the price about 30 €. Of course we have to bear in
mind a condition that expected positive effects will outnumber the drop-out of sales of 13 % of customers who
prefer the function which should be eliminated.
The second result from the target costing approach is that at the stage of research and product is possible to
establish criteria levels of the cost of individual components needed for production of PC desk that respect of market
price and the acceptable level of target profit. This is very important information for decision-making task of the
type Make or Buy. This is one from the trends of Contemporary Developmental Orientations in the Production on
Furniture Branch. About this problematic describe (Stasiak – Betlejewska Borkowski, 2007).

Reduction of costs by the managerial instruments

QFD, VE, DFMA...

Corpus Work tops Doors and drawer Connecting materials

Traditional cost Traditional cost Traditional cost and forging
29,68 € 38,16 € 29,59 € 20,39 €
Mounts and legs
7,28 €
Traditional cost

Traditional price of product without profit was

125,1 €

Fig. 3. Comparing analysis of traditional cost calculation and target costing

The third result of this analysis is that the traditional calculation projects costs of product before production
process and this method do not accept customer's requests but this method calculate costs on selected product and to
accept standards of production process. We can see that the production costs are 125,10 € and by target costing
calculation we can obtain costs for 109,10 € by the same planning profit charge 10 %.
The fourth result is that we can reduce costs of production for all components of selected product. For example
the costs of Corpus are 29,68 € and by the target costing method we can achieve 25,86 € - in summary it is 3,82 €
savings for one component. For one product we can save 16 € in costs.
The fifth result – target costing method shows assortment of production that customer wants and its
characteristics and this is advantages of this method.

5. Conclusion

Target costing as a modern method of calculation uses the principles of value analysis, by using instruments of
functional cost analysis and quantitative-function deployment can provide a functional differentiation of the product.
This approach can find limitations in the initial stage of research and product development, while 85 to 90 % of the
costs related to performance is the result of decisions made in the pre-production stages. The risk of this approach is
mainly at application of precision marketing research and determining the level of allowable costs for each
component of the products. By this means is possible to increase of competitiveness in manufacturing. This
approach has a high importance for quality assurance in pre-production phase and it’s increasing.

Acknowledgements

This contribution is the result of the projects implementation: Project VEGA 1/0669/13 Proactive crisis management
of industrial enterprises based on the concept of controlling.
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