The role of target costing in restructuring production costs to reach a competitive price: A case study in one of the Iraqi factories

Aqeel Salim Mohammad1
1 Wasit University, College of Administration and Economics

Статья в журнале

Экономика, предпринимательство и право
Том 11, Номер 1 (Январь 2021)

Цитировать:
Aqeel Salim Mohammad The role of target costing in restructuring production costs to reach a competitive price: A case study in one of the Iraqi factories // Экономика, предпринимательство и право. – 2021. – Том 11. – № 1. – С. 81-94. – doi: 10.18334/epp.11.1.111509.

Эта статья проиндексирована РИНЦ, см. https://elibrary.ru/item.asp?id=44741518

Аннотация:
The aim of this paper to identify the role of target costs in restructuring the cost of the product and reaching the competitive price by restructuring the cost of the product to reach a competitive price compared to the current competitive markets with other prices. One of the Iraqi private factories was used to achieve the goal of the research and, depending on the data, the restructuring was done. Indirect industrial costs of products and their analysis, and it has subsequently been shown that it is possible to use the target cost technique in competitive price events compared to the competing markets, to demonstrate the quality of the Iraqi product and to contribute to attracting investors.

Ключевые слова: target costs, industrial costs, competitive price, product cost

JEL-классификация: L26, M21, D24



Introduction

The business environment is currently aiming for huge developments, most notably the emergence of great competition between companies, technology and openness in trade and investment, shortening the life cycle of products and the resulting shift in customer tastes and their desire to search for products that enjoy low prices and high quality. Therefore, in light of these developments, it was Obvious, companies think about reconsidering traditional accounting to increase the cash directed at them due to their neglect of market considerations and the developments that took place in it and work to search for technologies that respond to these developments by producing products at the lowest cost and of high quality that achieve a competitive advantage in the market, so it is imperative to search for Techniques that meet the required purpose and among these technologies is the target cost technology, which represents one of the most important modern techniques for cost management that has developed to help the management of the facility is facing the challenges in the modern business environment, which is represented by the high competition, the diversity of customers' desires, the speed of change and the advancement in information technology and the industry, where this technology works effectively. Return from the competitive market price to product management and design to reach the target cost, the facility can achieve the desired profit and continue in the market by providing products that meet the customers' desires in terms of price and quality.

Research Methodology

Research problem

The developments that occurred in the business environment and that some companies practice in their activity B, in addition to the deteriorating economic conditions, economic stagnation, and the lack of job opportunities, most notably the emergence of competition in technological progress and its large production in trade and the short life cycle of the product and others led to fluctuations in the tastes Customers and their desires to search for products with low prices and high quality. Therefore, in light of developments, the need to find accounting techniques that improve the quality and value of the product through the targeted costing technology has emerged.

Research objective

The research aims to identify the role of target costing technology to improve product value and its role in reducing costs and increasing production.

Research hypothesis

Is it possible to use the target costing technique in developing and improving product value by reducing costs and increasing competitive opportunities?

The importance of the research

The importance of the research lies in restoring the Iraqi market to compete with foreign markets and demonstrating the value of the Iraqi product by using one of the modern technologies in production, which is the target cost technique.

History and reasons for the emergence of the target cost technique

The targeted cost technology began at the beginning of the sixties of the last century as a kind of response to competitive conditions, which is represented by the multiplication of the number of customers and the proliferation of products of European and American companies and Asian markets, and the lack of Japanese companies having sufficient experience to meet the performance of competitors in aspects of cost, quality and productivity.

The beginning of the application of target cost technology was in Japan by Toyota in the early sixties of the last century, as the origin of the idea was a simple American idea called value engineering, and Japanese industries replaced it with technology to reduce costs and plan profitability after it was used by General Electric during World War II. To produce products with the least number of parts, but the American companies did not know the power inherent in value engineering as a means of reducing costs and planning profitability, so they worked little with it after World War II, but Japanese companies expanded the concept of value engineering to target cost estimation (TC) [13, p. 2] (Ansari, Bell, 1997, p. 2). One of the most important reasons for the trend towards target cost technology is the defects that accompanied traditional costing systems, which led to a relative dismissal of them because they do not limit the price first, but rather determine the cost first and add the appropriate profit margin second, which is permitted for companies. By charging customers all costs in addition to the desired profit margin to reach the price, and therefore the price is renewed by the cost, and since the contemporary business environment is characterized by increased security Bankruptcy, focus on customers, advancement in industrial information technology, shortening product life, and other changes, so the price became directed by the market capacity and not the cost so that competitors offer their products that meet the customers' desires in terms of low price, high quality, and the cost changed from an inevitable result to a fundamental constraint that should be achieved through reduction The cost of the product without compromising the quality of the product is called the target cost [6, p. 565] (Hilton W. Ronald, Maher W. Michael, Frank H., 2000, p. 565). The target cost technique is one of the techniques of strategic cost management and represents an open system that restricts internal and external factors in the production process with the aim of increasing the company's profitability, increasing its ability to compete, and continuing to rely on conservatism. On the critical elements of success represented by the cost, quality, and appropriate timing of the product, and the most important reasons that motivated companies to use the target cost technique is the concept of the reduced price (reduced cost), as this concept refers to the decline of prices during the life cycle of the product, so when the product is presented for the first time in the market it is With a high price, the more manufacturers gain experience in the industry, the lower the price becomes The products are easily accessible by a large number of customers.

The target cost is the cost that allows companies to know their target profit when selling products at their target prices, and that the evaluated cost of the product is what cost to produce the product using production processes and technology that are currently in place. The estimated cost of producing the product is usually higher than the target cost and therefore because market forces require the company to it reduces its cost or loses part of the profits. Therefore, the company must follow sharp measures to reduce the estimated cost to the target cost [15, p. 35] (Salman Alaa Jassim, 2010, p. 35), and accordingly, the target cost is a strategic cost management technique that works with forwarding feeding that connects factors at the internal and external level of the company to increase profit and the ability to compete and perseverance by relying on the elements of success and maintaining them by following the advanced engineering methods and techniques. The conditions of competition and developments in the modern business environment, both internally and externally, have made companies gradually move from traditional technology to targeted cost technology [1, p. 32] (Al-Mousawi Abbas Nawar, 2007, p. 32). Therefore, the application of the target cost technique leads to achieving the following advantages: (www.gpuarab.com):

(1) Customers can buy the company's products smoothly and at low prices.

(2) It reduces the product development cycle.

(3) It significantly reduces the cost of the product.

(4) It works on the solidarity of the internal departments of the company and works as a team, taking on the responsibility of marketing, planning, developing, and manufacturing products.

(5) Mingling with customers and suppliers in designing products and knowing what is expected and preferences of the customer from the products of other companies.

(6) By setting the target cost as a clear and clear goal that leads to improving product quality.

The economic approach and the traditional cost input in determining the selling price

Decisions in product pricing are among the most important decisions that the administration must take because of their direct impact on the profits of the economic unit. Price can be defined as the expression of the value of products or services in units in the market. The price may affect factors including costs, nature of the product, the flexibility of demand, nature of the product, competitors, the behavior of competitors, and other factors. Which the council cannot mention, and economists may differ from accountants in determining the followed price, so the entries in product pricing will be divided into two types:

1. Economic approach to product pricing.

2. The traditional cost of determining the selling price.

It can be explained as follows [8, p. 369] (Kaplan, Atkinson, 1998, p. 369).

Economic input in product pricing

It can be determined according to the economic analysis according to the level that guarantees the highest levels of profits when the marginal revenue from selling the product is equal to the marginal cost, and the marginal revenue can be measured at different production and sales levels in the amount that guarantees the increase in the total sales revenue as a result of adding one unit Of the product and based on it the marginal cost is measured, in the amount that guarantees a surplus in the total costs as a result of adding one unit of this product.

· The traditional cost of determining the selling price:

One of the main factors that are taken into consideration is setting the price in working life, given the availability of data and comparing it with other factors, and the administration’s endeavor to cover its costs in the long term, at least until proceeding with its activities.

What is the target cost?

Target cost: It is the process of controlling and determining the total costs of the proposed and specific product, whose production leads to the generation of the required profitability at the price at which it is expected to be sold in the future.

also defined it as a cost planning method based on products with distinct or special operations and relatively short life cycle, and it is the cost method that is used in the first stage of the product life cycle, i.e. the stage of research, development and product engineering [10, p. 33] (Horvarth, 1993, p. 33).

Defined it as a set of steps aimed at reducing product costs that are determined based on an understanding of the desires and needs of customers [11, p. 75] (Yoshikawa, Innes, Mitchell, Masayasu, 1993, p. 75).

There is a lot of modern professional experience that has been made to apply the target cost method on a wide variety of products, processes, and procedures in a large-scale manufacturing company, and through that, we found that there are advantages offered by the target cost method, whether for the organization, customers and suppliers.

Therefore, the target cost method is based on Allowable Cost which is Target Cost = Expected Selling Price - Desired Profit.

Target costing is the control process that uses data and information in a logical series of steps to define and achieve the target cost of the product. Besides, the price and cost of the product with the unique and specialized functions that characterize du other competing products is determined by understanding and identifying the needs and desires of customers and their ability to pay for these features. Since the emergence of the target cost entry first appeared in Japan, it is appropriate to present the Japanese Association of Accountants ’definition of target cost, as it defined it as:

It is a process for managing profits in general by specifying levels of product quality that enable the organization to achieve its profit strategy, provided that those levels mentioned in the planning stages of the product are achieved as well as its development to the level that meets the aspirations and needs of customers.

Reasons for the trend towards the target cost system

One of the most important reasons for the trend towards the target cost system is the defects that marred the traditional systems, which led to the dismissal of those systems relatively, as they do not determine the selling price first, but rather determine the cost and add the appropriate profit margin, if this price is higher than the market price or if the company cannot sell at this price, so the selling price is reduced to the lowest possible amount, while we see that the target cost system has addressed this matter by first determining the market price and then determining the planned profit margin to be achieved and the difference between the market price and the planned profit represents the allowable cost. Accordingly, tests and designs are performed on the product to arrive at the permissible cost only.

Therefore, the target costs determine the allowable costs that allow achieving the required rate of profit from selling the product, so the target costs depend on market factors and variables, as many studies conducted have shown that the application of the target cost method improves the competitive position of the company and achieves the goals of improving quality and reducing costs. And accelerate the introduction of the product to the market, as the competitive environment in which companies operate does not tolerate error or delay.

Therefore, in light of this atmosphere, it was obvious and logical to try to develop to reach the best way to reduce the cost to achieve a highly competitive advantage in an environment characterized by strong dynamism, and after the competition moved to leadership in a greater cost reduction, and from this development, as we mentioned, it was an attempt to study and analyze the criticisms directed at traditional systems to find the best way to the same purpose, which is to reduce the cost.

Also, one of the reasons for the trend towards the target cost approach is the environment in which the establishments and companies live, as these companies face an environment characterized by several characteristics [13, p. 20] (Ansari, Bell, 1997, p. 20):

-A competitive environment.

- A fast-changing environment.

-An environment that does not tolerate delays or mistakes.

-An increasingly demanding environment.

Characteristics and difficulties of applying the target costing technique

Among the main characteristics of the target cost technique are as follows:

a. For the purpose of designing and producing products that achieve the target price required for success in the market, drawing the company's competitive future based on market-oriented management helped the management accordingly [1, p. 66] (Al-Mousawi Abbas Nawar, 2007, p. 66).

b. By producing products or providing services at or below the target cost and choosing the appropriate market in which the company competes, the company helped it achieve the goal of profitability [4, p. 438] (Weygandt Jerry, Kieso Donald, Kimmel Paul, 2002, p. 438).

c. The targeted costing technology works on concerted efforts for all departments in the facility when working with it and applying it [9, p. 892] (Drury Colin, 2000, p. 892).

d. It helps companies operating in the imperfectly competitive market to face competitive prices and maintain acceptable profit margins [5, p. 427] (Horngren Charles T., Foster George, Srikant M. Datar, 2000, p. 427).

e. A management tool that helps in finding the appropriate product design that leads to a reduction in costs and an improvement in the quality of products in comparison with traditional cost systems that are characterized by the process of documenting historical data [14, p. 8] (Hergeth H., 2000, p. 8).

On the other hand, the implementation of targeted costs faces some difficulties, the most important of which are the following [2, p. 51] (Al-Khafaji Muthana Hekmat, 2008, p. 51).

• Difficulty knowing customer desires

• Difficulty in determining the perceived value of each job property

• Difficulty in determining the specifications and characteristics of competing products

Steps to implement the target costing technique

The process of applying the targeted costing technique goes through the following basic steps:

A. Determine the target price

The target price can be defined as the competitive price that companies seek to reach to remain in the market [3, p. 16] (Blockar Edward D., Chem Hing H., Hin Thomas W., 1999, p. 16). As for the target price is defined by the price that the company believes will be placed for its product by its prospective customers in perfect condition for him [4, p. 438] (Weygandt Jerry, Kieso Donald, Kimmel Paul, 2002, p. 438). Believes that several parameters can be used by companies to determine the target price for their products, the most prominent of which are the following [1, p. 43] (Al-Mousawi Abbas Nawar, 2007, p. 43):

1. Customer's needs: This relates to the physical properties of the products desired by the customer, such as the product shape, appearance, color, size, etc.

2. Acceptable price: This is related to the customer's acceptance of the price and his ability to make a payment

3. Product specifications compared to competing products in the market

4. The effect of prices on the acceptable market shares

As for the methods that are used to estimate the target price, they include the following:

1. Resorting to the current market with the addition of a percentage against the market values ​​for the good characteristics of the product, such as if there is a new feature in the product that is not mentioned in the products available in the market [5, p. 687] (Horngren Charles T., Foster George, Srikant M. Datar, 2000, p. 687).

2. Dependence on competitive selling prices for companies that offer the same products or substitutes for the company [12, p. 40-43] (Dahlgread, Kristensen, Kanji, 2002).

3. Determining the target price based on jobs, as believes that the use of this method is based on the functional specifications of the product, which by accumulating the value of the product will increase. This method also assumes the possibility of dividing the selling price of the product on a group of elements as each element reflects a value the position is for the customer and then he is prepared to pay for that component

B. Defining a target profit

Profit target is defined as the profit that the company seeks to earn per unit sold of the product [5, p. 429] (Horngren Charles T., Foster George, Srikant M. Datar, 2000, p. 429).

We believe that the expression of the target profit is as a percentage of the target selling price and not as a percentage of the cost as is the case in the cost entry plus profit margin [6, p. 52] (Hilton W. Ronald, Maher W. Michael, Frank H., 2000, p. 52).

C. The calculation of target costs

The target costs are calculated by subtracting the target profit from the target price and according to the following equation [7, p. 562] (Maher Michael, 1997, p. 562).

D. Calculate current costs

He believes that determining the target costs of the product, its current costs are calculated that include the costs of all operations necessary for the production and delivery of the product during its life cycle, and the use of new methods for determining costs such as (A, B, C, D will help in determining costs more accurately [2, p. 61] (Al-Khafaji Muthana Hekmat, 2008, p. 61).

E. Calculate the targeted cost reduction

Targeted cost reduction is defined as the difference between target costs and current costs or is the value that the company should save in order to achieve profitability [6, p. 54] (Hilton W. Ronald, Maher W. Michael, Frank H., 2000, p. 54).

Believe that competitive pressures make target costs a general goal that must be reached, and there is no possibility of non-negotiation regarding the target costs. Therefore, it is necessary to employ methods that help the company realize its target mandate [8, p. 226] (Kaplan R., Atkinson A., 1998 p. 226).

Practical part

This study was applied to the Al-Akhawain Factory for the production of gypsum, a private sector for the food industry in Iraq – Baghdad Jameela Industrial, which is one of the factories specialized in the food industry, which are chips Hala, chips laionak, chips with cheese, Potato fingers (dadla fingers), chips lays, chips zozo, to reach to a comparison of a competitive nature with foreign products and the method of applying the concept of target cost to reach the required competitive price for which this research was designed .

Table 1

The pricing mechanism used for the products in Al-Akhawain Factory

Chips
(Hala)
Chips (Layoonak)
Chips with Cheese
Potato Fingers (Dadla)
Chips
(Lays)
Chips
Zozo) (
Type of products
1,625
1,878
2,120
2,125
2,120
2,037
The cost of raw materials
1
1,495
1,709
2,158
2,158
2,158
1,376
Packaging costs
2
3,546
3,546
3,546
3,546
3,546
3,546
Industrial indirect costs
3
6,667
7,133
7,824
7,829
7,824
6,959
Total summation (1+2+3)
4
467
499
548
548
548
487
The percentage of normal spoilage
7%
5
7,134
7,632
8,372
8,377
8,372
7,446
Total cost
(4+5)
6
1,070
1,144
1,256
1,256
1,256
1,117
Profit margin
15%
7
8,203
8,776
9,628
9,633
9,628
8,563
The selling price of the products
(6+7)
8
Source: complied by the author depending on the factory records.

Table 2

Quantities produced monthly in Al-Akhawain Factory

Chips
(Hala)
Chips (Layoonak)
Chips with Cheese
Potato Fingers (Dadla)
Chips
(Lays)
Chips
Zozo) (
Type of products
7,178
8,614
11,485
9,331
11,485
15,792
Monthly production
%10
%11
%15
%12
%15
%10
Production mix ratio
Source: complied by the author depending on the factory records.

From the tables 1, 2 above, it shows how to price the product through the initial cost of materials and the cost of packaging, as well as the industrial and natural wear costs of 7%, and then using the profit margin of 15% of the total costs of the product to determine the selling price and through table 3. The prices of the products will be determined in the competitive market.

Table 3

Product prices in the competition market

Competitive market price
Type of product
8,203
Chips (Hala)
8,776
Chips (Layoonak)
9,628
Chips with Cheese
9,633
Potato Fingers (Dadla)
9,628
Chips (Lays)
Source: complied by the author depending on the factory records.

During the determination of prices, it was found that the products (chips Hala, chips zozo) have lower prices than other products, which requires the distribution of costs in order to reach a competitive advantage. Table 4 shows the new mechanisms followed in pricing products:

Table 4

The mechanisms used in pricing in the factory

Chips
(Hala)
Chips (Layoonak)
Chips with Cheese
Potato Fingers (Dadla)
Chips
(Lays)
Chips
Zozo) (
Type of product
1,625
1,878
2,120
2,125
2,120
2,037
The cost of raw materials
1
1,495
1,709
2,158
2,158
2,158
1,376
Packaging costs
2
3,050
3,225
3,525
3,775
3,615
3,350
Industrial indirect costs
3
6,170
6,812
7,803
8,058
7,893
6,763
Total summation (1+2+3)
4
432
476.84
546
564
552
473
The percentage of normal spoilage
7%
5
6,601
7,288
8,349
8,622
8,445
7,236
Total cost
(4+5)
6
1,070
1,144
1,256
1,256
1,256
1,117
Profit margin
15%
7
7,671
8,432
9,605
9,878
9,701
8,353
The selling price of the products
(6+7)
8
Source: complied by the author depending on the factory records.

After re-distribution of the indirect industrial costs of both products (Hala Chips, chips zozo) and they were charged to the other products because the selling price for them was lower than the price of competitors in the market, so the costs of the Hala Chips were reduced from 3,546 to 3,050, and Zozo chips from 3,546 to 3,350, which means that The company will maintain its competitive edge and the same market share From table 5, the selling price of the products will be identified compared to the market selling price after re-pricing the products.

Table 5

Products prices after re-pricing in the factory

Competitive market price
Type of product
7,671
Chips (Hala)
8,432
Chips (Layoonak)
9,605
Chips with Cheese
9,878
Potato Fingers (Dadla)
9,701
Chips (Lays)
8,353
Chips (Hala)
Source: complied by the author depending on the factory records.

Through the above, the hypothesis that stated the following is proven correct: Adopting the target cost method in pricing products leads to restructuring the total costs of products and thus reaching the competitive selling price of the product.

Conclusions

(1) The existence of a positive relationship between the applications of the target cost in the industrial companies, which leads to the reduction of costs by knowing the amount of the cost previously, which is balanced with the capabilities of the organization.

(2) The target cost helps to offer products with specifications within the desires of consumers and their financial limits.

(3) There is a possibility of applying the target cost in the Iraqi industrial companies, as the results of the research showed.

Recommendations

• Costs must be reduced before they occur during the design stage because it is difficult to influence the cost after their occurrence, especially when the product life cycle is shortened.

• The main objective of the target cost entry is to reduce production costs while maintaining functional capabilities and the target quality level.

• The concept of target cost must be applied in the Iraqi industrial companies in order to be able to face the global and local competition in an orderly and clear manner.

• The necessity of the management’s keenness to eliminate the difficulties facing the application of the target cost approach so that the company can benefit from the advantages of the target cost approach.

• The awareness of managers, production engineers, cost accountants, and decision-makers of contemporary management methods, which includes the target cost method, must be increased and understood well.

• Cooperation between the work team within the companies in order to achieve the required goal.

• Modern production systems and continuous target cost programs must be introduced in companies to improve their performance.

• The necessity to use the value engineering method with the target cost because it uses the developed technology and is applied in the planning and implementation stage and helps in the process of continuous product improvement.


Источники:

1- Al-Mousawi. Abbas Nawar, (2007), Integration of the two technologies of target cost and continuous improvement and their reflection in the competitive strategies of economic units, unpublished doctoral thesis, College of Administration and Economics, Al-Mustansiriya University
2- Al-Khafaji, Muthana Hekmat, (2008) “The Role of Targeted Cost Technology in Improving Product Value Using Value Engineering, Unpublished Legal Accounting Letter, Board of Trustees at the Arab Institute for Certified Public Accountants
3- Blockar,Edward D.,Chem,Hing H., &Hin Thomas W.,(1999),"Cost Management : A Strategic Emphasis", 1st ed., MC Graw Hill CO.
4- Weygandt, Jerry,Kieso,Donald,&Kimmel,Paul,(2002),"Management Accounting",John Wiley & Sons Inc.
5- Horngren ,CharlesT.,Foster George &Srikant,M.Datar,(2000),"Cost Accounting :A managerial Emphasis",10th ed., Prentice Hall Inc.
6- Hilton,W. Ronald,Maher,W.Michael& H. Frank,(2000),"Cost Management For Strategy Business Decision",Irwin MC Grraw Hill CO.
7- Maher,Michael,(1997),"Cost Accounting :Creating Value For Management", 5th ed., MC Graw – Hill Companies, Inc.,USA.
8- Kaplan,R., &Atkinson,A.,(1998),"Advanced Management Accounting", 3th ed.,Prentice Hall Inc.
9- Drury,Colin, (2000),"Management & Cost Accounting " 5th ed., Thomason Learning
10- P. Horvarth, Target Costing: State of the Art Report, Arlington-Texas:
Computer Aided Manufacturing-International ( CAM-I ), (1993): 33.
11- T. Yoshikawa, J. Innes, F. Mitchell, and T. Masayasu, Target Cost,
Chapter Four, Contemporary Cost Management, first edition, Chapman and Hall,(1993):75
12- M. Morgan and P. Weerakoon, op.cit., 40-43
13- Ansari,S.l., &Bell,J.,(1997),"Target Costing : The Next Frontier in Strategic Cost Management:, MCGraw – Hill,USA.
14- Hergeth,H.,(2000),"Target Costing in the Textile Complet", Journal of Textile and apparel,Technology and Management,VOL.2,Issue IV
15- Salman, Alaa Jassim, Advanced Cost Accounting - An Administrative Introduction to the Contemporary Business Environment, Second Edition, Al-Sadiq Printing, Sana'a, Yemen, 2010

Страница обновлена: 22.04.2021 в 11:54:39