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Target cost management – the ladder to global survival and success by J. Rains

The contemporary market is dynamically changing. A large variability of the business environment increases and makes it necessary for firms to look for methods of assuring survival. Uncertainty and risk that are associated with business activity require special instruments to support managerial decision-making and to help a firm to gain and maintain success. From a business point of view risk understood as uncertainty is the possibility that desired expected profits will not be achieved; that actual future profits will deviate from the profits expected to result from managerial decision-making processes. Understanding the trade-offs that have to be made between risk and expected profit is integral to managerial decision-making. The risk-return trade-off concept is one of the most important principles in management. It plays a major role in decision-making processes. All managers like the idea of achieving high profits on the firm’s activities, most tend to dislike the high risks that are associated with anticipated high profits. The book Target Cost Management – the Ladder to Global Survival and Success gives managers a tool for achieving correct decision-making in the costing area, which can help a company to meet its goals. Each economic organisation needs to be analysed. On the one hand, analysis provides a check on how a firm’s activities have met the expected results; on the other hand it helps define directions and ways of continuous improvement of activities. Production costs and M&A costs affect the value of profits – they are the main factor in profit generation. So they should be measured and managed. The design, development and planning stages of a product and its manufacture are therefore critical to an organisation’s cost management processes. In the traditional method materials, labour and overhead costs are measured and a desired profit is added to determine the selling price. This method is not always suitable for the competitive market place and the changing business environment. To achieve success a company must follow market changes and customers needs. Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price. To ensure that the developed product is within the target cost, the development team needs cost estimation assistance on a continuous basis. The Author defines target costing as a ‘system that plans for and expects a constant, consistent, and acceptable level of profitability now and far into the future’, and suggests, ‘when there is a long-range, well-defined profit plan, future profits become predictable as well.’ He treats target costing as an element of the management process of the company, an entire value chain approach to managing. In the first part of the book the Author shows and discusses 10 rungs of a ladder to global survival and success. From the simplest first rung, which is continuous improvement (5S and visual control), through rung 4, which says that the company should be open to the customer (the opinion of the engineers, marketing, and sales is just that, an opinion, he confirms) to the most difficult rung 10, target costing, which the Author understands as the process of planning for the achievement of true cost or should-cost. Next, six elements of the rails of the ladder are defined and discussed: corporate strategy, focus on long-term profits and goals, customer focus, respect for humanity, respect for the environment and leadership. The Author discusses advantages and disadvantages of the target costing policy and method. He mentions that not all companies should use the method because for some it is not needed, and for some of them it can be a very difficult and time-consuming process to introduce. Chapter 5 discusses myths of target costing and describes some practical suggestions for a successful target costing implementation. This is very important part of the book because it shows, step by step, what should be done in the company when managers plan to introduce target costing procedures. Next the Author places the target cost planning group into the organisational structure of a company, and suggests integral working of company’s departments to set the target cost system. He pays particular attention to a very important rule: the target cost cannot be exceeded and cannot be abated. The cost should be proper. Target cost management requires a lot of information which should be collected and suitably transformed by computer systems. An example is given in chapter 10.