1. Acknowledgement 2. Preface 3. Introduction 4. The Process of Implementation - Target Costing into a New Product 5.

Establishing a Target Profit for the Product 6. Establishing a Selling Price for the Product 7. Market Driven Selling Price - Desired Profit = Target Cost 8. Determine the Target Cost 9. Perform Functional Cost Analysis and/or Value Engineering 10.Determine the Cost Estimate 11. Decision: is the Cost Estimate on Target? 12.Make the Final Decision 13.Achieving the Best Target Cost Possible 14.Which Type of Company Would Benefit From Target Costing? 15.Additional Factors Which Promote the Usefulness of Target Costing 16. Target costing tools and examples 17.Target costing case study 18.Bibliography

With deep sense of pleasure and satisfaction we have completed this project on Target Costing. We would like to extend our heartfelt thanks to Mr.Hamendra Kumar Poswal, Faculty College of business studies, whose invaluable guidance became a tremendous source of inspiration and helped us in completing the project. Lastly we thank all those who have directly or indirectly helped us in accomplishing this task. We hope that through our efforts you are able to get a glimpse of target costing in the best possible manner.

In management accounting, cost accounting establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision making to cut a company's costs and improve profitability Target costing is a pricing method used by firms. It is defined as "a cost management tool for reducing the overall cost of a product over its entire life-cycle with the help of production, engineering, research and design". A target cost is the maximum amount of cost that can be incurred on a product and with it the firm can still earn the required profit margin from that product at a particular selling price. In the traditional cost-plus pricing method materials, labor and overhead costs are measured and a desired profit is added to determine the selling price. Through this assignment we have tried to provide you with the best information on the topic.

TARGET COSTING
Introduction
Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price. A lengthy but complete definition is "Target Costing is a disciplined process for determining and achieving a full-stream cost at which a proposed product with specified functionality, performance, and quality must be produced in order to generate the desired profitability at the products anticipated selling price over a specified period of time in the future." As a totally new product and its industry develops, it starts to compete based on its new technology, concept, and/or service. Competitors emerge and the basis for competition evolves to other areas such as cycle time, quality, or reliability. As an industry becomes mature, the basis of competition typically moves to price. Profit margins shrink. Companies begin focusing on cost reduction. However, the cost structure for existing products is largely locked in and cost reduction activities have limited impact. As companies begin to realize that the majority of a product's costs are committed based on decisions made during the development of a product, the focus shifts to actions that can be taken during the product development phase. Until recently, engineers have focused on satisfying a customer's requirements. Most development personnel have viewed a product's cost as a dependent variable that is the result of the decisions made about a products functions, features and performance capabilities. Because a product's costs are often not assessed until later in the development cycle, it is common for product costs to be higher than desired. This process is represented in Figure 1.

Target costing represents a fundamentally different approach. It is based on three premises: 1.) Orienting products to customer affordability or market-driven pricing, 2.) Treating product cost as an independent variable during the definition of a product's requirements, 3.) Proactively working to achieve target cost during product and process development. This target costing approach is represented in Figure 2.

Target costing builds upon a design-to-cost (DTC) approach with the focus on market-driven target prices as a basis for establishing target costs. The target costing concept is similar to the cost as an independent variable (CAIV) approach used by the U.S. Department of Defense and to the price-to-win philosophy used by a number of companies pursuing contracts involving development under contract.

Target cost management (history)

CAM-I (Consortium for Advanced Manufacturing International) was established 1972 as an international non-profit-organization to carry out research and scholarship on management and manufacturing technology systems. CAM-I has launched an extensive study labeled as target cost management (TCM). The CAM-I study group made the following conclusions concerning the major changes needed: An overall management system is required to set the targets and to channel the decisions of all those involved in product definition and development towards wider corporate goals. Product management must widen to incorporate both physical and service attributes measured in terms of customer value. Cost management must shift its focus from accounting for the sake of accounting to enable expenditures to be used as a planning tool for creative product and process design. Product profitability must be assessed and planned in the context of a comprehensive life cycle and the relationship of a broad market value chain. (CAM-I TCM Study Group statements 1994.)

The following quotations have been taken from a state-of-the-art review about target costing. Target costing is a cost management concept that has been developed and practiced in Japanese companies since the 1970s and has been described in English mainly by Japanese authors. Target costing is built on a comprehensive set of cost planning, cost management and cost control instruments which are aimed primarily at the early stages of product and process design in order to influence product cost structures resulting from the market-derived requirements. The target costing process requires the cost orients coordination of all product related functions. (Horvth 1993.) Japanese management accounting uses classification of predetermined and actual costs. Predetermined costs are the expected measures of the cost before production, while actual costs are calculated after production. Predetermined costs are divided into standard costs and estimated costs. Standard costs depend on statistical data and are utilized as an index for cost management. Estimated costs depend on the managers past experience or intuition (Makido 1992). Target costing, as it has been developed in Japan, was invented by Toyota in 1965. Thus, the use of target costing has a long tradition at Toyota. At Toyota, they talk about cost planning and cost control, i.e. influencing product costs during the design phase and keeping the running costs as low as possible. Reducing cost through continuous improvement, cost kaizen, is becoming relatively less important, because the efforts made throughout the company will inevitably lead to fewer opportunities to cut costs. (Tanaka T 1993.)

For example, the lifetime target profit Ps of a new model (e.g. Celica) is calculated as follows:

Ps = P% * Sa where P% is the profit ratio of sales and Sa is the target sales. The sales target is calculated using the retail price Sa = Us * Qs where Us is the target retail price and Qs is the target production volume over the products life. Tanaka M (1989) claims that 80-90% of the life cycle cost is determined at the design phase of the product. Therefore, the present cost control system is focused on the design phase. The system consists of five stages: planning, concept design, basic design and manufacturing preparation.

The Process of Implementation - Target Costing into a New Product The target costing approach brings the management accountant into the process at the early planning stage. The management accountant is contributing to the early decisions Should the company be making this kind of product? What constraints need to be applied in the design stage? Is the market demand consistent with our projections? Can we achieve the determined return in this competitive of a market? Market Driven Selling Price - Desired Profit = Target Cost In the target costing model and opposed to the traditional method of costing, costs are not the driver rather they are driven. The market sets the price, management sets the profit margin, and the difference becomes the allowable costcost defined and constrained by price realities and profit goals. New and increasingly necessary, target costing abides to the following logical flow and procedures:

Establishing a Selling Price for the Product The target costing process begins by establishing a selling price, based on market research, for the new product. From this target-selling price, the desired (target) profit is subtracted to determine the target cost. In all likelihood, this target is below the companys current manufacturing cost. Teams from many departments then perform functional cost analysis in an attempt to reduce costs to a level in the acceptable range. If the current cost estimate is at the target, the firm must decide whether or not to introduce the new product. If the current cost estimate is above the target, functional cost analysis is used to make changes and prepare another cost estimate. Establishing a Target Profit for the Product Marketing plays a crucial role in the determination of the target cost. The starting point for a target cost is the estimated selling price for the product determined by market analysis. Sales volume is also estimated and, from the total estimated sales revenue, the desired profit is subtracted. Management determines this desired profit margin in reference to the companys long-term strategy. Retail prices and sales volumes are proposed by the marketing function based on its research and the companys desired market share. Total sales revenue for each new product over its life can now be estimated. The target profit, usually determined by using return on sales, is subtracted from the total sales revenue. The target cost is now determined. Determine the Target Cost The target profit is subtracted from the target price to arrive at the target cost. Management accounting can play an important role in effectively determining target profits and target costs. Accountants can supply the information required to support marketing analysis for a new product and relate it to existing products. After the target cost is determined by subtracting the target profit from the target price, functional cost analysis is used to achieve the target cost. Functional cost analysis is a group activity typically involving employees from different departments (such as marketing, design, engineering, production, purchasing, and accounting) and is aimed at proposing alternatives for reducing overall product cost. This team-oriented approach requires that the employees of different departments bring together their knowledge and experience in the organisation to contribute to the cost reduction process. Working with product designers, their motivation is not only to cut the number of parts but also to work toward the use of standard parts in designs that give products desired functions at a lower cost. Perform Functional Cost Analysis and/or Value Engineering Functional cost analysis requires the preparation of a logical diagram for each function of the product. It should be noted that this is not a diagram of each part of the product since it is the functions of a product that determine its success in the market. Each function and sub-function of the product is defined to show the various operations of the product.

Functional analysis is closely linked to value engineering. Functional analysis is a cost management system that focuses on the various functions of each product. The individual functions of a product become the set of cost objectives and provide the basis for the costing system. Value Engineering (VE) involves designing a product from different angles at a lower cost by reviewing the functions needed by customers. VE is used for purchasing, planning, design, production, and other processes on a company-wide basis. There are a variety of methods for conducting value engineering. The process generally starts with performance checks on test parts. Designs are changed to give each part a specific degree of performance. Then discussion turns to ways to cut costs while maintaining performance. The aim is to use the information provided by the functional analysis to propose alternatives for improving costs. Determine the Cost Estimate Functional analysis requires information concerning engineering specifications and accounting data. The actual manufacturing and the target cost for each products functions are compared. Alternatives are identified to bring each functions actual cost estimate to its target cost. Management accountants provide information on the cost effects of the proposed functional modifications. When needed, they prepare very detailed sets of cost tables that include the costs of alternative materials, of using different types of manufacturing technologies, and so on. Decision: is the Cost Estimate on Target? After the team consisting of members from the various functions of the company have used value engineering (as discussed in the following section) and functional cost analysis to determine the new products estimated cost, the estimate is compared with the target cost. If the cost estimate exceeds the target cost, functional cost analysis is used again to reduce the estimated cost to the target cost. It must be understood that this is not always a yes/no decision model. Although functional analysis is performed to determine if the product can be produced for less than the target cost, often product introductions are accepted when the initial review has the actual cost exceeding the target. This subjective approach is taken when it can be determined that, over the life of the product, the firm will be able to produce it for less than currently possible, and less than the target cost. Make the Final Decision Once the cost estimates are on target, management makes the final decision to introduce the product based on manufacturing feasibility, market needs and consumer acceptability. If the decision is to go ahead with the product, manufacturing is instructed to proceed with production. Once the decision has been made to manufacture the new product, there are other considerations necessary for successful implementation of the process. Since the target cost is often below the actual cost based on the

current production technology, a team effort is required to enable the organisation to achieve the target cost. Teams of people from marketing, engineering, purchasing, manufacturing, and accounting work together to assure that a cost position on the product is such that the company can sell the product at its required market price to insure the desired target return on the product. Finally, target costing does not end once the decision has been made to move the product into the production stage. The standard manufacturing cost of the product depends on specific production line conditions. For example, production on lines below capacity pushes costs up, while production on lines near full capacity leads to the best-cost performance. Often during the planning stage, it is difficult to visualise the line conditions and thus reflect accurately these conditions in cost estimates. Therefore, once the initial target cost has been calculated, the manufacturing division then initiates an effort to improve on the standard cost, in order to get it down to the target cost. Achieving the Best Target Cost Possible Potential world-class manufacturers have the resources available to lead the way in working towards the lowest target cost. Target costs can only be achieved and eventually improved upon when more people are involved in the design improvement process and work to further refine the responsible design engineers best effort. To achieve the best target costs possible, these practical guidelines should be followed: Do not spend man-years developing the ultimate product costs. Rather, allocate time to simply estimating or prorating these costs; Ensure that each component and assembly design is reviewed by a cross functional group of managers. The intent of this review is not to design by committee but to generate new ideas on how the design engineer can achieve the target cost; Provide the appropriate checks and balances within your product design department. Do not have the original engineer try to improve upon his product, assign a design engineer other than the original designer to improve the design; Assign responsibility for pursuing cost opportunities to the specific group members according to their own areas of expertise. The following ten steps are required to install a comprehensive target costing approach within an organization.
1. Re-orient culture and attitudes. The first and most challenging

step is re-orient thinking toward market-driven pricing and prioritized customer needs rather than just technical requirements as a basis for product development. This is a fundamental change from the attitude in most organizations where cost is the result of the design rather than the influencer of the design and that pricing is derived from building up a estimate of the cost of manufacturing a product.

2. Establish a market-driven target price. A target price needs to

be established based upon market factors such as the company position in the market place (market share), business and market penetration strategy, competition and competitive price response, targeted market niche or price point, and elasticity of demand. If the company is responding to a request for proposal/quotation, the target price is based on analysis of the price to win considering customer affordability and competitive analysis.
3. Determine the target cost. Once the target price is established, a

worksheet (see example below) is used to calculate the target cost by subtracting the standard profit margin, warranty reserves, and any uncontrollable corporate allocations. If a bid includes nonrecurring development costs, these are also subtracted. The target cost is allocated down to lower level assemblies of subsystems in a manner consistent with the structure of teams or individual designer responsibilities.

4. Balance target cost with requirements. Before the target cost

is finalized, it must be considered in conjunction with product requirements. The greatest opportunity to control a product's costs is through proper setting of requirements or specifications. This requires a careful understanding of the voice of the customer, use of conjoint analysis to understand the value that customers place on particular product capabilities, and use of techniques such as quality function deployment to help make these trade-offs among various product requirements including target cost.

5. Establish a target costing process and a team-based

organization. A well-defined process is required that integrates activities and tasks to support to support target costing. This process needs to be based on early and proactive consideration of target costs and incorporate tools and methodologies described subsequently. Further, a team-based organization is required that integrates essential disciplines such as marketing, engineering, manufacturing, purchasing, and finance. Responsibilities to support target costing need to be clearly defined.
6. Brainstorm and analyze alternatives. The second most

significant opportunity to achieve cost reduction is through consideration of multiple concept and design alternatives for both the product and its manufacturing and support processes at each stage of the development cycle. These opportunities can be achieved when there is out-of-the-box or creative consideration of alternatives coupled with structured analysis and decision-making methods.
7. Establish product cost models to support decision-

making. Product cost models and cost tables provide the tools to evaluate the implications of concept and design alternatives. In the early stages of development, these models are based on parametric estimating or analogy techniques. Further on in the development cycle as the product and process become more defined, these models are based on industrial engineering or bottom-up estimating techniques. The models need to be comprehensive to address all of the proposed materials, fabrication processes, and assembly process and need to be validated to insure reasonable accuracy. A target cost worksheet can be used to capture the various elements of product cost, compare alternatives, as well as track changing estimates against target cost over the development cycle.
8. Use tools to reduce costs. Use of tools and methodologies

related to design for manufacturability and assembly, design for inspection and test, modularity and part standardization, and value analysis or function analysis. These methodologies will consist of guidelines, databases, training, procedures, and supporting analytic tools.
9. Reduce indirect cost application. Since a significant portion of a

product's costs (typically 30-50%) are indirect, these costs must also be addressed. The enterprise must examine these costs, reengineer indirect business processes, and minimize non-valueadded costs. But in addition to these steps, development personnel generally lack an understanding of the relationship of these costs to the product and process design decisions that they make. Use of activity-based costing and an understanding of the organization's cost drivers can provide a basis for understanding how design decisions impact indirect costs and, as a result, allow their avoidance.

10. Measure results and maintain management focus. Current

estimated costs need to be tracked against target cost throughout development and the rate of closure monitored. Management needs to focus attention of target cost achievement during design reviews and phase-gate reviews to communicate the importance of target costing to the organization

Target costing as an outsourcing techniques

A widely diffuse cost management method used by consultant firms is the Target Costing (TC). Using the TC method consultants aim at designing products that satisfy both consumers (with specific product functionality and quality) and achieve the target cost resulting from the combination of costs of semi-processed products, components, and services. The TC process is a system of profit planning and cost management that is price led, customer focused, design centred and cross functional. It can start at the earliest stage of product development and can be applied throughout the product life cycle by actively referring to the whole value chain. The two main relevant phases of TC consist in the consumer orientation realised on the basis of the market, and in the development of new product, in which its life cycle and the value chain are analyzed in crossfunctional teams. In order to achieve this cost reduction, different techniques are deployed throughout the firm, and members of a cross functional team have to work together in order to design products that at the same time satisfy consumers and achieve the target cost resulting from the combination of semi-processed products, components, and services [Sakurai, 1989; Cooper, 2002]. In other words: "[] target costing is not a cost quantification technique, but rather a complete cost reduction program, starting even before the first drawings of the product have been prepared. It is an approach aimed at reducing the cost of new products throughout their lifecycle, while meeting consumer requirements in terms of quality and reliability among others, examining all conceivable ideas relating to cost reduction at the planning, development and prototyping stage. Target costing is not a simple cost reduction technique, but a complete, strategic profit management system" [Kato, 1993]. In this practice knowledge about strategies, products, functionalities, should be trustfully shared, in a multidisciplinary and cross functional team. Even if the team members work using various tools (such as Value Engineering, Variety Reduction Program, cost table, Quality Function Deployment, Design For Manufacturing and Assembly [Monden and Sakurai, 1989; Akao, 1989; Yoshikawa and Innes, Mitchell, 1989; Yoshikawa, Innes and Mitchell, 1990; Koudate and Suzue, 1990; Gerthardt, Hutchinson and Mistry, 1991]) people need to share perspectives, create a common agreement and an understanding of promising combination of products, sustaining innovation. These significant issues are even more

important if the cost management processes are in outsourcing. In this case outsource and outsourcers should share knowledge and strategic vision on products and services functionalities and characteristics. Therefore a new knowledge based approach aiming at analyzing these processes should be introduced.

Which Type of Company Would Benefit From Target Costing?

Whenever a new and innovative approach to doing business is discovered, the question arises as to which clients and potential clients might this methodology provide an appropriate fit. In addition, and consistent with many new financial or operational approaches, target costing may not be for everyone. Some companies, which seem to benefit most from target costing, are those, which maintain the following criteria: Assembly-oriented industries, as opposed to repetitive-process industries that produce homogeneous products; Involved heavily with the diversification of the product lines; Use technologies of factory automation, including computer-aided design, flexible manufacturing systems, office automation, and computer-aided manufacturing; Have experienced shorter product life cycles where the pay-back for factory automation typically must be achieved in less than eight years; Must develop systems for reducing costs during the planning, design and development stages of a products life cycle; Are implementing management methods such as just-in-time, value engineering, and total quality control

Additional Factors Which Promote the Usefulness of Target Costing

The above listing is not completely exhaustive as a variety of factors are at work to promote the usefulness of target costing in other companies. First, products are experiencing shortening life cycles, so the design phase of a product is critical to managing costs. Manufacturing costs are driven primarily by the characteristics of the products and the process used to manufacture them. Manufacturing processes are determined by the nature of the product and the expected volume to be produced. Therefore, to a great extent, costs are determined in the design stage. Another factor which encourages the use of target costing is product diversity. The types of products manufactured by companies have

increased rapidly in recent years. Target costing, in both the design and production stages, helps manage costs effectively. However, applying target costing in the design stage has the greatest cost reduction potential and bottom-line impact.

Target costing tools and examples

Product Development Toolkit

Bill of Materials and Supplier Plan. The Bill of Material Worksheet provides a flexible tool to develop a preliminary engineering bill of material. It provides single and multiple level views and maintains a variety of related information. Items are coded as make, buy or standard and buy items can be automatically moved to the Supplier Plan to aid and track sourcing decisions. The Bill of Material Worksheet also includes integrated cost roll-up capabilities and comparison to target costs. Control Plan. Control Plans aid in the manufacture of quality products to meet customer requirements. The Control Plan provide a written description of the process and quality controls to assure an acceptable product and to minimize product and process variation. Design for Manufacturability & Assembly Evaluation. Design for Assembly (DFA) refers to the principles of designing products so that they are more manufacturable. The DFA Assessment Worksheet provides a simple to use assessment methodology to evaluate concepts and designs early in the development process before sufficient information may be available to use more formal DFM/A analysis software or companies that don't want to make a more significant investment in DFA software. Design for Manufacturability Guidelines. Designs for Manufacturability/Assembly Checklist/Guidelines are included to aid designers develop producible designs. These checklists/guidelines can be adapted to the company's specific product and process requirements. The checklists/guidelines cover assembly, printed circuits, machining, sheet metal, and injection moulding. Failure Modes and Effects Analysis. Failure Modes and Effects Analysis (FMEA) is a methodology for analyzing potential product and process reliability problems early in the development cycle where it is easier to take actions to overcome these issues, thereby enhancing reliability through design. The FMEA Worksheet is used to identify potential failure modes, determine their effect on the operation of the product or process, and identify actions to mitigate the failures.

Product Map. A graphical worksheet that can be used to capture the planned development of new products that relate to a product line, on a time line. Quality Function Deployment. Quality function deployment is a structured planning and decision-making methodology for capturing customer needs (voice of the customer) and translating those needs into product requirements or technical characteristics, part characteristics, process plans and quality plans. PD-Track provides a series of planning matrices to document the information and plans developed during this process. These include a Product Planning Matrix (house of quality), Concept Selection Matrix, Deployment Matrix, and Process Planning Matrix. Note that the Control Plan serves as the planning matrix for process and quality control. Radar Chart. A graphical tool for comparing the key attributes of a new product to competitive products or solutions. Target Costing Workbook. Target costing establishes a marketdriven target price to be successful and derives a target cost to drive product development. Includes a Target Cost Calculation Worksheet, a Target Cost Evaluation Worksheet, and a Target Cost Tracking Worksheet and Charts.

TARGET COSTING CASE STUDY

Creactive Consulting S.p.A. is an Italian consulting company in cost management for medium and large companies. Established in the 2000, now Creactive Consulting S.p.A. is specialised in offering cost

management services such as: expense reduction projects for a specific cost area (e.g. logistics), projects for one specific expense category (e.g. express delivery) or special jobs for critical areas. The firm carried out many projects of costs reduction for over 100 different clients, both public organizations and private companies which belong to Italian and international firms. Flexibility and concrete approach together with a steady activity to develop new solutions have allowed the company to work in any area and on any category of cost: from the easier general expenses to the more complex dynamics of core business costs. The success of Creactive Consulting S.p.A. is sustained by its system of reward (based on success fees on achieved savings), the active participation in multidivisional teams, and the ability of consultant to understand the corporate cost structure of clients (spending data models, demand analysis, strategy compliance, etc.), the capacity to find feasible deviations in the cost structure of products and services, and the ability to propose and then test innovative solutions.

Case Study: Culp Inc.

Culp, Inc., a US textile manufacturer for the home furnishings industry with net sales in FY 2008 of $254M, introduced a target costing system in 1994. Beginning the project, they realised the need for better-cost management and have worked to overcome that issue. Culps journey has led them to a realisation that cost management is different from other accounting efforts, and has undertaken a target costing program to help them build profits and decrease the cost of their products at the design stage. We implemented this system using a team approach to cost management and by bringing together the divergent groups in the company - accounting, engineering and operations - to make our cost system as up-to-the minute as possible John M. Brausch, CMA Cost Accounting Manager, Culp Inc. At Culp, they recognised the importance of breaking down the traditional barriers of the firm toward cost management. This approach was addressed using a series of three strategies. Strategy 1 Separate the functions of managerial and financial accounting so that each could serve its customer to the best advantage. This separation is important to any management accounting system evolution. Strategy 2 Achieve a level of accurate product costing. The accuracy school of cost management obviously is concerned with accurate product costs. Although this goal sometimes sounds simplistic, it is not always that easy to get product costs as close to actual as possible.

Strategy 3

Going from the accuracy school to target costing. Costing products accurately is a worthy goal. Accurate product costing, however, in and of itself does little to improve the firms position and does nothing to reduce costs. This strategy includes the discovery that an overwhelming majority of costs were created and built into the products before the manufacturing process ever begins. Although it is used primarily in Japan, Western World companies can adopt the practice and accrue the benefits resulting from this application of strategic cost management. Cost management can play a major part in any firms strategic efforts. Management accountants must become involved in the strategic decisionmaking processes of their firms. They have a wealth of information about the firm and its operating conditions.

Target Costing in Turkish Manufacturing Enterprises

Abstract Rapid developments in technology, change in customer expectations, shortening product life cycles and especially increasing global competition force the companies reach the targets of low cost, short time and high quality at the same time and the highest level possible. Therefore, companies utilize the modern management accounting techniques in achieving these goals. One of the most important among these methods is Target Costing. The empirical study conducted in this paper about target costing is a descriptive research covering the years 2007 and 2008. The companies within this study are selected from the top 500 manufacturing companies listed in ISO (Istanbul Chamber of Commerce) 2006 index. The aim of the study is to reveal the basic differences between those companies which apply target costing, in terms of application level and to analyze applicability of the technique.

1. Introduction

It has become compulsory for todays companies to reach product-related cost, time, quality and functionality targets at the same time and at the maximum level possible; in order for them to develop sustainable competitive advantage through producing quality and functional products as demanded by the customers over a price determined by the market, and to maintain their existence in the ever changing environment. This compulsion, on one hand, require planning and control of the cost prices of the products and services to continuously decrease them, and on the other hand, aggravates profit and cost planning. This situation has revealed the concept of market-oriented product development and strategic cost management, and in order to achieve this, various methods and techniques have been developed and put into practice. One of the methods developed under the leadership of Japanese companies, as a result of these perceptions, is Target Costing method. Being an extension of Japanese management philosophy, target costing has a completely different perception and application process than the traditional perspective both in terms of design and pricing of the product and determination and management of the costs. Despite being characterized as a cost and profit management technique, target costing has an integrated application process in which both traditional and modern cost management methods must be employed together with marketing, production and engineering techniques. From this point of view, it has the characteristics of a system or a process rather than a technique. Although the origin and first applications of target costing were Ford Motor Company in the USA in the early 1990s, Volkswagen in Germany and Marks-Spencer in England in 1930s, the first systematic application and development was by Japanese Toyota in the mid 1960s. In

the late 1980s, it started to be used broadly in the USA, Germany and the other European countries. Target costing came into Turkish literature in the mid 1990s and thereafter started to be discussed. However, these discussions always stayed at conceptual and theoretical levels. There were not any sufficient and comprehensive studies about its application level at that time. In order to fill this gap, a descriptive study on the private sector manufacturing companies listed in the Top 500 Turkish Industrial Entities announced yearly by the Istanbul Chamber of Commerce (ISO) was made.

2. The Purpose, Scope and Constraints of the Study

2.1. The Purpose of the Study The purpose of this study is to determine whether target costing is used by the Turkish manufacturing companies; and whether those companies using the technique apply the principles of the target costing application process in their customer expectation, profit margin, cost and price determination, cost reduction and management operations. 2.2. The Universe, Scope and Constraints of the Study The universe of the study consists of the private sector manufacturing companies listed in the Top 500 Turkish Industrial Entities announced yearly by the Istanbul Chamber of Commerce (ISO). Within 2006 ISO 500, there are 487 private sector companies. Of these, 15 companies which did not want their names to be revealed; and 21 companies operating in mining and electricity production industries, which were thought of not suitable for the application of target costing; were left out of the scope. Eventually, 451 companies listed in 2006 ISO 500 index made up the universe of the study. The reason of selecting the companies listed in ISO 500 as the universe of the study is the belief that these companies are more institutionalized and hence they have the strong corporate discipline necessary for the application of extensive and complex techniques such as target costing and that more reliable and consistent information can be derived from these companies. Another reason for the selection of the manufacturing companies listed in ISO 500 is that target costing is more suitable for and used by manufacturing companies than the companies operated in the financial and service sectors, as indicated in most field studies in the literature as well. 3.1. The Application Level of Target Costing In this section, the application level and form of target costing among the participating companies and the distribution level in terms of industries are given. It was not directly asked to the responding managers if they have used target costing method. Instead, in order to have better results and to see if they were using an application even if it is not named target costing, an encompassing definition and basic principles of target costing process is given in the survey. It was asked to the respondents to reply the questions by taking this definition into consideration. Target costing process is; a strategic profit planning and cost management technique, in which a product that is to be manufactured in accordance with the functionality and quality demanded by the customer and determined by market research, is sold at an estimated sale price (the price which the customers are willing to pay), by determining the product cost which will provide the profitability level requested by the company. In the target costing process, sale price of the product determined by the market (customers) is the starting point of determining the target cost. The sale price and the desired profit margin must be determined before cost. In order to reach the target cost; concentration on

the cost reduction opportunities in the design stage rather than production, constantly reduction of costs during the product life cycle, participation of all departments of the enterprise and all members of the value chain (accounting, design, manufacturing, marketing, customers, suppliers etc.) to the process of determination and reduction of costs, are required. According to the target costing definition given above; 53 or approximately 59% of the 90 participating companies stated that they do not apply target costing at all, 14 (16%) stated that they apply in a good manner, 1 (1%) of them stated that it started to apply but has not yet fully do so, 10 (11%) stated that they are planning to apply in the future and 12 (13%) of the companies stated that they are applying a similar method to target costing under a different name. The only enterprise which has just started to use the target costing method, the 12 which are applying a similar method to target costing under a different name and the enterprises which apply and which do not apply can be grouped. Accordingly, it is revealed that 63 out of 90 enterprises do not apply target costing, while 27 of them apply the method. Approximately 11% of the companies stated that they have been applying target costing for less than 1 year, 22% for 1-2 years, 4% for 2-3 years, 7% for 3-4 years, 7% for 4-5 years and 48% of the companies stated that they have been applying the method for more than 5 years. It is seen that the target costing method which has been used by the Japanese companies for approximately 35-40 years and by the US and European companies for many years, is comparatively new in Turkish companies. Approximately 67% of the companies apply target costing for all of the products and 33% apply for only some of the products. In the field studies done in literature, it is stated that target costing can be applied both to all of the products and to only limited products or product components throughout the company (Kim, Ansari,Bell and Swenson, 1999; Corrigan, 1996; Feil, Hook and Kim, 2004). As per these results, it can be said that target costing method is applied to all of the products throughout the company rather than to some products in the Turkish manufacturing companies. Besides, the level of the cost targets set by the companies support this finding. Approximately 70% of the companies determine cost targets for all of the products in the product line, 22% determine for only the new products in the product line and 11% determines for only the important parts of a product. In respect of industries and the application rate; 3 out of the 5 companies which operate in the automotive industry and which responded to the survey apply target costing method and also the automotive industry, with %60, has the highest application ratio of target costing. Automotive industry is followed by the others respectively; machine and paper with a ratio of 50%, nonferrous metals with 40%, textile with 38% and food industry with 36%. The industries with the least application ratios are as follows; iron and steel with 20%, oil-rubberglass with 21%, cement with 25%, others (construction) with 25% and chemical industry with 29%. The participant companies in medical-optical instruments and medicine industries have 0% application ratios of target costing. The average application ratio of target costing among the 90 respondent companies is 30%. Past similar researches done about target costing in other countries reveals the following evidence; 35% of target costing application ratio was found as a result of the research done on 60 Indian manufacturing companies in 2001 Joshi, 2001). Similarly, 59,4% application ratio was found on 32 Dutch manufacturing companies in 2003, 61% was found on 180 Japanese manufacturing companies in 1991-92 (Borgernas and Fridh, 2003), 40% was found on 120 US companies in 1999 (Braxton, 1999), 16,5% was found on 91 Swedish manufacturing companies in 2003 (Borgernas and Fridh, 2003), 41% was found on 214 Malaysian manufacturing companies in 1998 (Sulaiman, Ahmad and Alwi, 2004) and 38% was found on 78 Australian companies in 1998 (Chanhall and Langfield- Smith, 1998). According to the research done about specific management accounting techniques by

Ernst&Young and the Institute of Management Accountants (IMA) on approximately 2000 companies worldwide (40% being manufacturing companies) including the Fortune 1000 companies, the application ratio of target costing among the companies is 26% and the ratio of the companies which plan to apply target costing is more than 40% (Ernst&Young and IMA, 2003). Besides, the highest industrial application ratios according to some of these studies are respectively; automotive (100%), electronics (88%), machine (83%) and medicaloptical instruments industries (75%) in Japan (1992); oil-rubber, electronics, textile, steel and medical-optical instruments (100%), automotive and chemical industries (50%) in the Netherlands (2003); communication tools (67%), machine and metal industries (30%) in Sweden (2003). In the frame of these data; it can be claimed that the application ratio of the Turkish manufacturing companies both in terms of average and in terms of industry is low, when compared to other countries. In addition, the common evidence emerging from these studies is that target costing is applied more in high-tech based assembly industries (such as automotive, electronics, machine and textile industries) rather than the process oriented industries (such as medicine, food, iron and steel, chemical, oil-rubber-glass and cement industries). The results of this study done on the Turkish manufacturing companies support this claim as well. 3.2. The Comformity Level of the Application of Target Costing In this section, businesses using target costing are evaluated in order to determine the application level of target costing, in terms of the practices guided by the basic principles of target costing. 3.2.1. Manufacturing Methods of the Companies During the examination of the field studies in the literature, it was determined that target costing is more suitable for the companies which produce a wide range of products in small amounts by combining numerous parts together, than for those which continuously produce a few number of products in large amounts (Monden and Hamada, 1991). In other words, target costing can be more easily executed in the assembly-oriented industries than in the process-oriented industries (Morgan, 1993; Gagne and Discenza, 1995; Hergeth, 2002; Dekker and Smidt, 2003). A vast majority such as 70,3% of the companies applying target costing indicate that they have manufacturing-assembly oriented and 29,6% claim that they have processdependent manufacturing methods, which is an expected situation. Another evidence supporting this result is the length of the product life cycles (new product development and redesign of the existing products frequency) of the participating companies. 3.2.2. Product Development Frequency Because frequent change of design in assembly industries is mandatory, product life cycles are shorter than those of the process industries. For this reason, target costing is more often used by the companies which frequently change design and which have shorter product life cycles (Hergeth, 2002; Morgan, 1993). 40,7% of the companies applying target costing introduce new products to the market in less than one year, 29,6% of them introduce in one to two years. The reason of approximately 70% of the companies (40,7% + 29,6%) having short product life cycles is that most of them (70,3%) have assembly-oriented manufacturing methods. 3.2.3. Factors Related to the Operation Environments of the Companies The competition environment of the participating companies using target costing or similar methods was aimed to determine by directing questions to the executives about how they perceive their operation environments.

It is realized that most of the companies applying target costing or similar methods operate in an environment of very high ambiguity and competition. Also in the past studies in the literature, it is stated that especially Japanese companies developed and applied target costing because of the increasing ambiguity and the intense competition in the market (Ansari, Bell and CAM-I, 1997; Shimizu and Lewis, 1998; Dekker and Smidt, 2003). Therefore, the use of target costing or similar methods in the markets with environmental ambiguity and high competition is quite important for the success of the companies. In conclusion, it can be claimed that there is an increasing competition combined with a dynamic environment, and this situation encourages the application of target costing by the Turkish manufacturing companies. 3.2.4. Competition Strategies of the Companies Questions were directed to determine the strategies pursued by the companies applying target costing in order to ensure competitive advantage, and the degree of importance those companies give to the strategies. According to the statistical averages and percentages, the most important competition strategy components for most of the companies applying target costing are respectively, (4,60 - 85,2%), offering more quality and functional products (4,44 - 92,6%), manufacturing the products with lower cost and offering with lower price (4,38 - 85,1%), offering more and better product features than the rivals (4,27 - 74,1%), assuring that the products be delivered to the customers quickly (4,19 - 88,9%) and Introducing new products to the market against the rivals (3,56 - 59,2%). Accordingly, it is observed that the companies give as much importance to the cost leadership strategy as the differentiation strategy. At the same time, most companies are sensitive about introducing new products to the market before the rivals. It is not possible for companies to gain sustainable competitive advantage by following low cost-based differentiation strategy, because of the fierce competition they face. For this reason, todays competitive environment requires the success-requesting companies simultaneous competition about price/cost, quality, functionality and speed, which are of the strategic competition elements characterizing a product. In order to survive, a business must pass or at least catch the performance of the rivals in all of these four dimensions. In conclusion, it is revealed that the companies which use target costing or similar methods pursue balanced competition strategies. 3.2.5. Factors Concerning the Market Analysis of the Companies Questions were asked in order to determine the examination degree of information about price, sales volume, customer demands and expectations which are also basic components of market-oriented target costing in the market analysis done by the companies using target costing. It can be stated that most companies give enough importance to the determination of the elements of market research which is the starting point of the application of target costing. However, it is necessary for the companies to make more effort about determination of the probable price that customers may want to pay for the product (4,23 - 85,2%) which is a basic principle of target costing application. Market-oriented target costing process executes a product development strategy that focuses the businesses to the principal opportunity, that is, the ultimate customer. Understanding and revealing the evident and secret needs of the customers in order to find the product features (in terms of price, quality, and functionality) which provide maximum customer satisfaction, is the most important component of target costing process and needs to be continuously analyzed during the process. Because if customer demands and needs are misunderstood or not understood at all, product development and design will be delayed and that misunderstanding will be the most important reason for the product failure in the market. Therefore, questions were asked about

at which level of the manufacturing process, how frequently and by which means the companies which use target costing and those which do not use assess customer demands and expectations, in order to determine whether those companies make customer analysis suitable with target costing. 3.2.6. Determination Way and Time of Customer Expectations According to the answers, giving more importance to the determination of customer expectations before product design (3,89 - 70,3%) and continuously reviewing during the design stage (3,72 - 55,5%) by most enterprises is an expected situation. Notwithstanding that, this situation creates a limitation in the enterprises not giving enough importance to predesign market research, in terms of the determination of customer expectations being marketoriented. Therefore, companies must give more importance to the pre-design customer analysis while determining the future products which will satisfy their customers and will be sold for profitability as well. Besides, instead of obtainment of the customer input via feedback (2,84 - 40,7%) from the suppliers and sellers by the companies, further use of systematic methods suitable for establishing customer input, such as survey applications (3,83 - 59,2%) is a positive situation for the successful application of target costing as well. 3.2.7. Enterprises Employment Degree of Long-Term Product and Profit Planning During the target costing process, the enterprises must do product and profit planning in consequence of the market research after the determination of the customer needs, suitable product features and the estimated sales volume and price, and before passing to the design stage. These plans will be the basis for the determination of the target costs of the products. For this reason, the results regarding whether the participating enterprises do long-term product and profit planning which is one of the fundamental requirements of target costing process, and the degree of application. Most of the (4,33 - 88,8%) enterprises employment degree is Long-Term Product and Profit Planning and this is a positive situation for the successful application of target costing. As a consequence, the companies not doing or not giving the necessary importance to long-term product and profit planning, which is fundamental both for obtainment of the desired profitability from the product and for the success of target costing applications, need to review their present conditions and establish or revise these plans. 4.3.8. Methods of New Product Price Determination of the Enterprises The results concerning which methods and how frequent the participating enterprises use while determining the sale price of a new product, which is one of the most important dimensions of the target costing process, are unexpected. The enterprises frequently use the cost + profit (3,46 - 44,4%) method. This is as much of an unexpected situation as their use of the methods basing on the price which customers are willing to pay and/or the price that will provide achieving the target market share (3,52 51,8%), which are suitable pricing methods for target costing conception. The least used method is the competition oriented pricing method which is based on setting the price equal to or lower than that of the rivals (2,74 - 3,7%) which is a component of market-oriented pricing method that also reflects the target costing conception. The role of the costs in the stage of determination of the target price in target costing application is very unimportant. There are numerous factors to be taken into consideration in a pricing decision. However, among the factors affecting the pricing decisions of the enterprises, cost is usually the easiest and most strictly controllable factor by the enterprises. Therefore, the cost plus pricing method which is commonly used by most companies, is completely opposite to the application logic of target costing. Because the target sale price in the target costing method is the estimated price the prospective customers are willing to pay for the product. This estimated price is primarily based on the simultaneous prediction of the value given by the

customer to the triad of price, quality and functionality. In addition, it must not be forgotten that this estimated price is to reflect the balance between numerous factors such as the market share desired from the product, the prices of the rival products, long-term sale and profitability targets of the company and the image of the company. Hence, the dependency of product pricing to cost, will be a handicap for the successful application of target costing. In addition, despite that the companies give pretty much of importance to the determination of the estimated sale price which customers are willing to pay which is one of the factors companies take into account in market research, and that they have a market-oriented perception, the high application frequency of the cost plus method creates a conflict. One of the evaluation limitations of this study is that; the factors to be taken into account in the determination of the products sale price, in order for the aforementioned conflict and the pricing perceptions to be better explained, are not examined. 3.2.9. Distribution of Target Profit Determination Methods The methods that the participating companies use in the determination of the target profit margin of a new product, which is one of the basic components of the target costing process, are asked to the respondents. According to the answers, the most commonly used method by the companies in determining profit target or profitability ratio is, because of some advantages it has, the return on sales (ROS-37%), as mentioned in the literature as well. Calculation of the profit as a percentage of the estimated cost of the product (22,2%) is completely contrary to the understanding of target costing. Because in the target costing application, the target profit margin must be determined independently of the costs and based on the long-term profitability analyses which are done in parallel with the financial objectives and the strategy of the enterprise. Profit margin calculated as a percentage of the estimated cost of the product which reflects the traditional cost plus approach is, however, calculated based on the expected cost of the product and contrary to target costing; in this approach, profit margin, but not the cost of the product, is the dependent variable. For this reason, it is revealed that the companies using this method do not have the sufficient perception in terms of strategic profit management, which is one of the basic components of target costing. Nevertheless, the total application ratio of the return on sales (ROS), return on investment (ROI) and the overall profitability of the products in the product line methods which are stated to be suitable for target costing application and are applied broadly, being 74% among the Turkish manufacturing companies exhibits a suitable application profile to the understanding of target costing. As a result, the enterprises that determine cost-based profit margin should renounce the understanding of determining target profit margins or profitability rates based on costs and apply methods appropriate for strategic profit management. 3.2.10. Timing of New Products Cost Estimation The enterprises included in the research were asked several questions concerning the stages they make cost estimation which is made at several stages for determining target cost of new products as the final objective of target costing. Most of the enterprises make cost estimations seriously and systematically, by 77,8% percent after the identification of product as a concept, by 96,3% during the product designation phase, by 22,2% after the production. Accordingly, the concentration of cost estimation of enterprises at stages before the production and especially at the designation phase is expectable from the point of the application mentality of target costing. Therefore, in the target costing process, instead of beginning the designation of the product and waiting for the realized costs, initially the target cost is determined (cost estimation is made) for the product that will meet the functionality and the quality customers seek and also the profit margin the enterprise seek, by means of a market research and afterwards the product is designed in accordance with this target cost and cost estimation. In other words, the costs that will exist during life cycle of the product are determined at pre-production designation phase and the

production is done in line with these costs after the designation. So all the costs concerning product are estimated or determined at pre-production phase. Also, the fact that 78% of the enterprises that apply target costing states they do not make any cost estimation after the beginning of the production and 100% of these enterprises do not make any cost estimation after the end of production, reveals clearly this quality of application process of target costing. These results show that enterprises have one of the basic reasons for the application of target costing. While traditional approaches focuses on determination and controlling of post-production costs, the target costing approach is based on the management and determination of costs before the materialization of costs. Therefore, target costing process necessitates a cost estimation system that provide an increasing accuracy level from the concept phase of a product until being ready for the designation and an extensive cost planning. 3.2.11. Cost Components in the Cost Estimation In order to identify the extent of the cost estimation systems and cost planning, the cost components that take place in the cost estimation of a new product were asked to the enterprises included in the research. 63% of the enterprises using target costing uses pre-production costs, 100% uses production costs, 77,8% uses marketing costs and distribution/logistics costs, 59,3% uses service/support costs and 63% uses recycling costs in the cost estimations. Accordingly, the estimation and determination production costs as the cost component in the pre-production phase is an expected situation for the application mentality of target costing. On the other hand the number of enterprises that estimate preproduction costs like market research and research/development (R&D) costs is lower than the expected for the target costing. Attaching inadequate importance to market research especially to customer analysis and also allocating insufficient resources for R&D activities can be stated as reasons for this situation. So it can be said that no estimation and cost planning regarding these cost components are made. The fact that no research regarding R&D activities has been done constitutes a constraint for assessment. Similarly, it can not be said that the number of enterprises that estimate service and recycling costs in the pre-production phase is high. However, the majority of enterprises inclusion of marketing and distribution costs in the cost calculation as the cost component of a new products is a positive situation for the success of target costing. As a result, according to these findings it can be stated that the majority of the enterprises that apply target costing or a method similar to target costing do have an extensive cost estimation system and correspondingly apply a successful cost planning. Also, the replies of the enterprises to questions regarding product life cycle costing approach and cost planning utilization degree supports these findings. Most of the enterprises that apply target costing state that they do cost planning (4,22 85,1%) for new products and they generally adopt the product life cycle costing (3,68 51,8%) approach. 3.2.12. Determination of Costs and the Use of Interdepartmental Teams for Cost Reduction Operations The results regarding the determination of costs and the use of cross-functional teams for cost reduction operations and the usage degree by the enterprises included in the research. The use of cross-functional teams (4,23 81,4%) for the determination of costs and cost reduction operations is significantly high. Although this result is expected, for the enterprises where the determination of costs and the use of cross-functional coordination for cost reduction operations are low, this constitutes a constraint for the successful application of target costing because target costing necessitates a very high coordination among departments and forces departments for coordination. The coordination provided by the cross-functional teams that are composed by the participation of the departments in the

enterprise and other value chain representatives, provides that the customer demands about the product and the strategic aims of the enterprise will be understood by all departments and all other value chain members. In this coordination process the basic element that keeps the teams together is the target cost. In order to search for cost saving opportunities regarding the new product in the all phases, from the designation phase to after sale services, these teams which will take the responsibility of cost determination, will analyze product design, raw material requirement, production and post-production processes systematically and provide the decrease of unit costs to target cost level. Therefore the use of these teams which are responsible for result of target costing applications is the most important factor in the target cost applications. However, just the use of cross-functional teams is not enough for the success of target costing; also the maximum participation of all members of value chain should be provided. 3.2.13. Participation Rate of Departments and Value Chain Members to Cost Decreasing Process The participation level of departments to cross-functional target costing teams in the enterprises can be said to be high. However, the low participation rate (2,91 29,6%) of suppliers that should be the most important members of target costing teams, is a constraint for the success of target costing activities. As a result of this data, it is impossible to be successful if the cross-functional teams are not utilized in product cost estimation and cost decreasing process or the necessary importance is not given. At the same time, it can be said that the utilization level and the structure of crossfunctional teams depend on enterprises adoption level of product life cycle costing approach and the scope of cost planning. Most of the participating enterprises possession of the understanding of product life cycle costing and the scope of cost planning support these findings. 3.2.14. Application Level of the Cost Decreasing Activities The results regarding the application level of the activities that the enterprises involved in the research do for decreasing the product costs are presented below. The cost decreasing activities of the enterprises according to application level are respectively; trying to supply cheaper materials and parts without compromising quality (4,52 88,9%), examining and redesigning pre and post-production phases (4,52 96,3%), concentrating on product design (4,15 77,7%), extracting the features and functions that increases the product cost (1,96 3,7%) and using low-quality materials and parts (1,08 0%). According to these results, it can be said that majority of the enterprises tend to behave according to target costing in order to decrease the costs of the products. Because target costing is a strategic profit and cost management process which aims at decreasing the total costs throughout the lifecycle of the product by concentrating on its design which will enable it to be produced at a cost level that will enable the firm to reach the target profit level or market share without giving concessions from the quality, feature and functionality of the product that the customers are expecting and are willing top pay for. As understood from this definition, in the target costing method, neither low quality inputs should be used nor the functions and features that the customer is willing to pay for should not be extracted from the product in order to decrease costs. On the contrary, the target costing approach underlines the fact that an enterprise should reach and go beyond the rival products in every one of these components in order to sustain its competitiveness. At the same time, target costing accepts the design of products and processes as the critical point of cost management and cost decreasing. Because more than 80% of the lifecycle cost of a product is determined during the design and development stage and because the product and process technologies begin to be more integrated, both the design of the product and the activities needed to produce the

product is the most important factor for cost decreasing. This is why during the target costing process, by focusing on the design, which will enable cost decreasing throughout the lifecycle, it is determined whether the design may or may not cause after production costs which are not appropriate for customer value and income. Thus, in this way some time consuming and expensive changes that might be faced are eliminated beforehand and both the cost of the product and market entrance period is decreased. 3.2.15. Application Degree of Methods, Tools and Techniques That Can be Benefited From Decreasing Costs At the same time, the value engineering technique during the design of the product, the simultaneous engineering applications during the design of the products and processes and the kaizen costing approach which expresses the constant improvement of the processes before and after the production all give an answer that support this finding. In addition to this, during cost decreasing and management the use of Total Quality Management, Activity Based Costing/Management and On Time Production are very important in terms of the success of the target costing applications. The methods, tools and techniques that can be used to decrease product costs by companies that use target costing are listed according to their application degrees as; constant improvement (Kaizen) (4,48 - 100%), total quality management (4,33 - 92,5%), value engineering (4,00 - 59,2%), value analyzing (4,00 - 59,2%), on time production (3,96 70,3%), action/operation based costing (3,92 - 62,9%) and simultaneous engineering (3,23- 44,4%). As a result, it is a positive fact in terms of the success of target costing applications which these methods, tools and techniques that can be used in decreasing production costs and their management is highly used by many companies. Although the fact that the amount of value engineering/analyzing, total quality management and Kaizen costing techniques which enable focus on product and process design plus detection of cost savings are used more by companies to decrease costs to desired levels and their management, it cant be said that the usage level of specially simultaneous engineering between companies is high. This is why, companies must give more weight to the simultaneous design of products and production designs to benefit from target costing applications greatly. 3.2.16. Application Level of Strategies that will be Followed when Companies Determine the Costs Foreseen in the Designing Period The results according to the application degree of strategies that will be used when companies determine that the cost foreseen in the designing stage will be exceeded or when it is determined that it cant be decreased to target cost levels assessed before production are shown below. Most of the companies give priority to decreasing the amount of profit expected (3,37 48,1%) and increasing the foreseen price of the product (3,12 - 37%) strategies. Decreasing the profit margin by the management which is determined according to the strategic purposes of the firm may be an appropriate strategy to increase the market share of the product and to position it in the market. Although decreasing the target profit margin may seem negative at first glance, with an increase in sales related with market conditions or with an increase in the cost of the product related with its lifecycle, reaching the targeted profit rate will be possible. At the same time, this strategy can be analyzed according to the total profit rate of a product group which a product belongs to. Before taking a decision on lowering target margin of profits desired, these situations should be well analyzed. Secondly, in the target costing implementations, increasing of target sale price, which will be determined to depend on wishes and ability to pay of customers independently from cost, may be is the last strategy which should be evaluated because in the competitive market conditions, acting with cost plus pricing contrasts strongly, with target costing

implementation reasons. In order to determine a high price level, product should be really new product which can raise its value perceived by customers and should be different from its rival products or business should have the monopolist or price determining position in the market. But, this situation should be carefully analyzed in terms of market share or sales volume which will enable the level of profitability which the business desires. However, it can be said that one of the reasons of high level implementation of this strategy is that companies quite use cost-plus method in pricing of new products. In order to clarify the reason why this strategy is chosen, the fact that factors, which should be taken into account while determining target sale price, have not researched in this study does not constitute the assessment deficiency. The third strategy of companies to define the implementation degree is either abandoning the product or disapproving [discarding] its production (2,36 - 11,1%) as a last resort. Because, too much time and effort has been allocated to the product. Although in successfully implemented cost targeting practices, the possibility of abandoning the product is too low, this strategy should be resorted just in the cases where alternative solutions exhausted for achieving cost targeting. However manufacturing of any product that doesnt contribute to the strategic goals of the business should not be let. The fourth strategy of companies for implementation degree is shrinking product qualities and functions (1,50 - 0%). This strategy should be implemented if diminishing qualities of the product affect market price, which is used for determining the target cost, positively. The strategy of raising target cost of a product should be resorted in extra-ordinary cases if presence of a specific product increases the demand of other products that enforces continuation of the product line; or in cases on time product supply prevents market share and income loss. In such cases cost increases should be dealt immediately by over viewing design process in detail and developing other counter measures. Incautious measures distort necessary discipline for achieving target costs. Consequently, half of the companies primary strategy of increasing selling prices affects the implication of cost targeting negatively. Scarce need for application of increasing target cost strategy is particularly good. 3.2.17. Level of Relationship of the Companies with Their Suppliers The results inferred from the answers of research-partaken companies to the question about the level of relationship with their suppliers are submitted below. Among the companies using target costing and in terms of the priority given to the participation in the statements reflecting the degree of relations with the suppliers; although companies stated (3,93- 77,7%) that during the stage of product and process design continues coordination with the suppliers is positively accepted; sharing all kind of information including design costs via regularly incorporating important producers in the product design process reflecting the quality of this coordination, (2,96 - 40,7%) and the low level of support and education provided to producers about the problems they face are negative situations. Sharing information on design and costs as well as other cost management techniques between companies and suppliers in order to find proper ways to decrease costs is the basis of the benefits of target costing process. On the contrary, it could be affirmed that the relationship between companies and suppliers is built on sharing technical information regarding the design and keeping suppliers under control (4,08 70,3%) through determining cost objectives rather then sharing information on the product design. In other words, there is pressure to achieve these objectives via predicting costs of the product components provided by the supplier instead of ensuring the participation of suppliers in the cost predicting process. Similarly, these findings are also supported by the cost predictions of suppliers for new products and the low degree of involvement in the cost decreasing process. In addition, although the dependence on companies in terms of the job or the companies control over suppliers is low (3,42 - 48,1%) the pressure of the companies, which have a cost pressure on

the suppliers, may only be balanced by helping the suppliers lower costs. This can only be achieved by putting suppliers inside the product cost analysis before determining target costs, helping suppliers with the problems they face during design problems and sharing information plus experiences related to quality, delivery, customer wishes and cost management. By this way, this strategic cooperation will enable early assessment of the prices of products and will also enable new ideas to come forth about companies making alternative design possibilities, which makes it easier to reach the desired functioning level during decreasing costs. As a result, during target costing, it is almost impossible to decrease costs without the participation of suppliers. The suppliers must be seen as part of a developing firm and a strategic partner. This is why, if the weak relationship between the suppliers and the enterprise turns to a more cooperative structure and if the integration degree of the design process is increased, then it is more likely that the gain from target costing and the possibility of it being applied successfully will increase.

4. Conclusion and Suggestions

The primary results of this evaluation study concerning the application level of target costing among the Turkish manufacturing enterprises (ISO 500) can be summarized as follows: The companies applying target costing or having a similar process have extensive market analyses and marketing information systems. They follow balanced competition strategies. They must give more importance to determine the customer expectations before the product design, in order to fully provide the expected benefit from target costing. Their pricing of the new products by depending on cost usually poses an obstacle to the successful application of target costing. They have comprehensive cost estimation systems and can be considered as applying cost planning successfully. Correspondingly, most of these companies have the understanding of product life cycle costing. If weak relationships between these companies and their suppliers is transformed to a more collaborative structure and if the integration degree of the design processes is increased, the benefits to be gained from the target costing process will increase evenly. Majority of these companies operate in competitive market conditions.

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