Target costing is the process of setting a target cost for a new product design and requiring the product design team to either meet the cost target or abandon the project if it cannot do so. The accounting department’s sole involvement in this process is typically the inclusion of a cost accountant on the design team who monitors the team’s ongoing progress in meeting its cost goals.
The problem with this level of accounting involvement is that there is no linkage to the corporate budgeting process, so there is likely to be a reduced level of budgeting accuracy for the cost of goods sold. To improve the situation, require the participating cost accountants to forward status reports to the budgeting staff for the current status of all product design projects for which target costing is used. This has the following positive impacts on the budgeting process:
The preliminary budget can be adjusted continually to reflect the go/no-go status of each design project. Thus, if the decision is made to eliminate a prospective product, its related revenues and costs can be immediately removed from the budget model.
The budgeted cost of goods sold for each product can be adjusted to match the estimated final cost of each new product design.
To incorporate this target costing information into the budgeting process, the budget model must already itemize revenues and costs at the individual product level. However, if the current budget ...