Costing methods used in combination can be used as a devastating weapon for creation of economically and social benefits. But it’s often misunderstood and miss- represented which leads to further poor understanding and implementation of the tools. The world only sleeps and dreams about financial management which is blindly being chased, but cost accounting tools create financial management if the costing tools are used in combination. In this article and hence forth I will be coming up with articles which will help to create economic and social synergies through efficient combination of cost strategies.
Target costing, the concept more being implemented and adopted after the debacle of 2008.It would be wrong to say that before 2008 it was never adopted. The western economies had in-fact exploited the target costing concept. One of the biggest proofs of exploitation is the mortgage business which gave birth to the recession of 2008.
Target costing cannot be implemented without understanding proper costing of a product as well as the market of a product. Target costing is not cost control but it is control of cost. Target costing control the future cost and helps in designing the product structure. For a country like India where rural India is the prime focus target costing helps to deign cost structures. In an economy like India where inflation and interest rates rules the economy in every three years designing cost structure has taken a radical change over the years. In India cost accountants cannot control cost only by recording expenditures. Product engineering and value creation is the new model which is highly being implemented which requires better understanding of cost propositions. Better understanding of cost proposition means converting target costing into comprehensive costing. We cost accountants need to shift from cost management to profit management since controlling the former is cumbersome due to Indian economic inflation factors so management of profit needs to be focused. I call this new target costing perspective comprehensive target costing. In addition to the original activities of target costing, comprehensive target costing adds the management of achieving the target profit of new products.
It includes setting the target cost and target profit throughout the life cycle of the new product, and managing such activities as the product planning, development, design, manufacturing preparation, manufacturing, physical distribution, sales, after sales, usage, and disposal. You can see that this is a major shift in thinking, philosophy, and of course effort to develop, maintain, and control. It is anticipated that any of you reading this can then realize if a company can actually do this, they are in the best position to control their destiny and overcome their competition.
For example in the financial industry we find much software’s being provide for financial planning for advisory business model. Advisors use this software for financial planning for their clients. Now in this highly competitive industry where so many companies are having so many products, every advisor may not be appropriate to sell all the products. Moreover for every advisor all the product features may not be the requirement since every advisor has his own product selling domain but he is compelled to pay and accept higher charges for all those products features which he never takes into account.
But when the software is being sold or membership license is being provide they are compelled to accept the entire product feature based software despite the advisor deals with single product. The price remains the same irrespective of the single product requirement of an advisor. The flaw in the system is that companies have the prime motive to derive the cost of producing the software from every advisor irrespective of the requirements by an individual advisor.
Now imagine that if a company just tweaks its policies and gives independent choice of choosing software requirement for an advisor then the company and its product opens up the gate of all types of advisor and increase its product market size. Hence the company changed its policy from cost management to profit management. Earlier the company was focused towards only on cost management where it aggressively focused towards recovery of cost of production by selling all the product features without accessing the individual requirements.
Through this the company will be able to design the product structure and also access the market potentiality and will be able to attract many more advisors which lead to higher profitability. Knowing the competition and competitor is the way to adopt target costing which leads to achievement of balance score card. Now a question might come up that while discussing about target costing how do we came up with Balanced score card. Well among one of the prime pillars of balanced score card is customer perspective which can only be achieved through adoption of target costing. In balanced score card we know that understanding the customer and its preference and behavior change can create optimum results for companies .But after understanding the consumer appetite the next pillar of process of Balance score card is internal process development. This development is being achieved by adoption of various cost accounting methods and strategies. Among the several strategies target costing plays one of the vital role while achieving the consumer satisfaction which finally leads to financial perspective of the Balance score card.
Balanced score card is the ay to create financial management which can only be achieved if the internal process is being developed by using efficient cost methods. Well balanced score card is often miss represented and often remains an bookish theory since financial management is blindly being chased. Cost management means to run your business using cost as the main criteria. The cost management activity needs to be both continuous and integrated throughout the organization. When fully institutionalized, cost management concepts will be used in all products, services, organizations, processes, and procedures within and around the company. Thus to be effective, the cost management concept has to be accepted as a policy by company leadership.
Indraneel Sen Gupta
Master in Economics/MBA in International Business/ICAI (FINAL)