TARGET - COSTING: MODERN METHOD OF COST CALCULATION AND ANALYSIS

IN ROMANIA

Maria Toma
Bank - Finance Accounting Department, Faculty of Economics, University of Targoviste
Wallachia, Romania
[email protected]

Abstract: The profound changes that have occurred in recent decades have led to
changes in the economic life in the mechanism of internal management of the company,
involved in the management costs.In the current socio-economic context more complex
and uncertain, the company needs a global cost calculation system and pertinent therefore
emerges the need to find relevant calculation methods and cost analysis.In countries like
the US, Japan, France this approach was obtained using methods adapted to the
requirements of current practice, of which mind: ABC Method (method of calculation and
cost analysis activities) method Target - Costing (objective cost method or target cost
method) and value analysis method. The paper presents theoretical concepts of target-
costing method, accompanied by a case study for better understanding of the advantages
of applying this method in calculating and analyzing costs at Romanian enterprises.Target
costs are based on the rule that the market dictates the selling prices and not the
businesses costs.However, because the market is not interested in the cost structure
(variable and fixed, direct and indirect operating, financial and extraordinary, controllable
and uncontrollable, determined and discretionary;actual and preset etc.) is necessary to
cover long-term undertaking all the entriprises’ costs.Therefore, directly or indirectly,
accounting and cost analysis plays an important role in strategic decisions, the basic tool
of strategic pilotage of any undertaking.Modern methods of calculation and analysis of
costs, are part of a larger whole strategy aimed at the market, production
management,human resources management, enterprise relationship with his environment,
following a new trend called "simultaneous engineering".

Keywords: cost objective, expected margin, simultaneous engineering

JEL classification: M41

1. Introduction
Using the method target - costing in the calculation and analysis of costs was imposed by
the essential changes that have occurred in the internal and external environment of the
enterprise:
- the need to produce small quantities to meet the changing needs of consumers;
- the introduction of new methods of organizing the production (such as JIT: Just-In-
Time);
- further automation of production processes (eg. CIMS systems: Computer
Integrated Manufacturing Systems);
- increasing the share of Research and Development expenditure;
- increasing the share of indirect costs.
The basic principles of the method are:
- calculation and cost analysis is done by product, because:
· the product links the business with the market;
· product carries profit.
- calculation and cost analysis is carried out throughout the lifetime of the product.
This method is based on statistical finding that ≈ 80-90% of the cost of a product are still
committed to the design phase.Therefore the ability to influence the cost decreases as it

457
progresses in stages of creating a product.
- viability of a product is measured by reference to the market in the double aspect:
price and customer satisfaction.
The methods’ principle is thet: the market dictates the selling price and not cost of
undertakings, therefore a product launched on the market must respond to its imperatives
since conception. In these circumstances, it is necessary to obtain information on the sale
price accepted by customers, since the product design phase. The cost of the products
that can be made to be correlated with the market price, this cost is called the target cost,
which is estimated to cost in terms of a competitive sale price forecast.
Target Cost = Sale price competitive forecasted – Margin expected
It is a total opposite logic to the one to make a product with certain characteristics
(technical, economic, functional, etc.), the one to see how much it costs and add a margin:
Cost achieved + Margin desired = Selling price
Competitive selling price is estimated based on a combination of external and internal
factors: the needs of potential customers, purchasing power of its, competitors'
prices, the degree of rivalry in the sector, the existing production capacities in introducing
of new technologies, etc., and margin based on an average margin sector and business
objectives in return.
The estimated cost of a product is defined taking into account:
- functions that the product must satisfy in order to meet customer needs;
- technical skills, technological and human enterprise.
If the estimated cost is higher than the target cost, functions, components, manufacturing
process of the product are reviewed in order to bring the estimated cost of the target cost.If
the estimated cost remains above target cost, product development project is
abandoned.Objective cost or target cost aims to provide a rigorous method of reducing the
cost of a new product, to ensure a sufficient margins while keeping balance with its quality.
Reduce costs on businesses as a whole, may be achieved in particular by:
- cost analysis in the phase of product design;
- control various phases of product life;
- reducing the time of conception and launch of new products;
- better organization of relations with customers and suppliers;
- mobilize and motivate all business units and ensuring greater compatibility.
Defining features of target-costing method:
- is a unitary concept of product-oriented management costs;
- is based on functional analysis of costs (how much the value of the product to
cover as many functions) to analyze the substitution (what product can do the same with
lower costs or better insurance functions);
- product orientation to customer requirements, the customer expects a certain
relation between price and functional capacity of the product and the company should
focus on producing these requirements;
- ensuring competitive capacity instead of quick savings;
- knowledge of costs in an early stage of the product birthday;
We note, objective cost method does not require a specific single technical, but a set of
tools and methods (value analysis, functional analysis, evaluation matrix, value chain,
ABC, etc.), therefore is expensive and requires the involvement of all business units; but its
application is a way to improve enterprise performance.By doing so, are identified and
resolved problems and special interests, potential conflicts between the objectives are
discovered in time, and in this way prevents subsequent modification costs or delays in
product promotion market.

458
2. Case Study

To better understand the workings of the method, we present a case study:

The company I & A has as its object the production and marketing of women's lingerie. It
sells its’ production in Romania through a network of supermarkets. The company wants to
penetrate the market stores specializing in luxury goods,offering them high quality
products. To this end it has attracted a workshop for the manufacture of body.The
workshop is an autonomous management center.The director of this workshop seeks to
achieve cost optimization returns 10% of the assignment to the company I & A.Officials
from the I & A made a thorough study of product-market couple, negotiated with major
stores and a representative panel of specialist shops in order to determine selling prices to
be proposed final customer.

Table 1: Distribution circle

Large Stores Specialized Stores
Modele M1 M2 M3 M4 M5
Unit selling
price without
163,170 233,025 309,690 454,470 604,740
taxes (euro /
pcs.)

Management center director must produce by taking into account these selling
prices.Having calculated the costs of different models by ABC, asks you to help him (it will
not influence the assumption of selling price and cost).
1. With the help of Annex 1, we calculate the transfer price which will be applied
during the transfer of goods from the company I & A workshop and deduct the cost target
to be reached to achieve the objective of profitability.
2. Starting in Annexes 2, 3, 4, 5 and 6 compare the estimated costs of the target
obtained at point 1 and draw conclusions.
Annex 1: the level of the successive margins
The transfer price of products in the company I & A is equal to 60% of the selling price
to distributors (rest covers distribution costs, overheads and margins in the company I
& A). Margin realized by supermarkets is 25% of their sales price, the specialized
shops is 50%.

Table 2: Annexe 2 - classification of materials and unit purchase price of

materials
Model Unit
acquisition
M1 M2 M3 M4 M5
price
Materials
1. Cotton Lining 0,20 0,20 0,30 0,30 0,30 55,000
2. Elastic Lace - - - - 0,20 19,500
3. Lace bed - - 0,40 0,40 - 17,125
4. Knit 48% polyamide - 0,10 - - - 72,000
5. Knit 92% polyamide - - 0,10 - - 78,500
6. Knit 95% cotton - - - 0,10 - 98,500
7. English embroidery 0,10 - - - - 33,500
8. Removable braces 2 2 - - 2 5,000
9. Eyelet 2 2 2 - 2 1,300
10. Bra hook - - - - 1 1,225
11. Buttons - - - 1 - 1,750
459
12. Fittings - 2 2 - 2 3,075
13. Wherefore 1 1 1 - - 2,800
14. Laceof 5 cm - - - 0,30 - 11,000
15. Laceof 8 cm - - - 0,40 0,40 15,000
16. Elastic ribbon 0,8 - - 0,8 - 3,750
17. Coat hanger 1 1 - - - 1,750
18. Individual packaging - - 1 1 1 2,250

Table 3: Annexe 3 - Allocation of indirect costs on situation analysis centers on

the activities and drivers
Analysis Indirect Activities Induction activities
Center Expenses
Supply 571,700 Relations suppliers Reference number materials
Control reception Reference number materials
Supervision of stock Reference number materials
Supply of tailoring Number of manipulation
Purchasing from other sections Number of lots in manufacturing
Tailoring 1.562,900 Consultancy development Number of patterns
patterns Number of lots in manufacturing
Ordering Number of manipulation
Quilting and Cutting
Sewing 3.195,340 Sewing machine Number of minutes
Machine
Paking 283,500 Packaging specialized stores Number of products for specialized
Packaging for supermarkets stores
Number of products for
supermarkets
Control 142,200 Control Number of lots in manufacturing
Administration 1.021,300 Accounts payable Reference number materials
General administration Value-added materials
6.776,940
Tabel 4: Annexe 4 - The allocation of indirect costs regrouping centers on
activities and unit cost per inductor
Regrouping
Inductors’ Unit cost per
centers on Inductor Expenses
volume inductor
activities
C1 Reference number materials 358,000 18 19,89
C2 Number of manipulations 1.254,000 772 1,62
C3 Number of lots in manufacturing 444,200 636 0,70
C4 Number of patterns 395,000 5 79,00
C5 Number of minutes 3.195,340 1.893.000 0,0017
Number of products for specialized
C6 198,000 63 3,14
stores
Number of products for
C7 85,500 53 1,61
supermarkets
C8 Value-added to materials 846,900 5.930.640 0,0143%
Total 6.776,940 x x

Tabel 5: Annexe 5 - Thecalculation of the unit cost estimated thru patterns of

ABC method

M1 M2 M3 M4 M5
Materials 34,500 41,500 45,000 49,500 46,375
Reference number materials 1,380 1,875 2,790 6,915 6,500
Number of manipulations 1,705 1,290 28,140 30,705 20,475
Number of lots in manufacturing 1,345 1,430 9,255 10,095 10,095
460
Number of patterns 1,320 2,085 3,945 5,385 10,770
Number of minutes 16,455 24,855 24,060 32,910 25,320
Number of products for specialized - - 4,710 4,710 4,710
stores
Number of products for 1,810 1,975 - - -
supermarkets
Production cost 58,515 75,000 117,900 140,220 124,245
Value-added to materials 3,000 4,920 10,410 12,945 11,100
Estimated cost 61,515 79,920 128,310 153,165 135,345

Tabel 6: Annex 6–Production conditions, number of lots in manufacturing

Pattern M1 M2 M3 M4 M5
Producţia 90.000 57.000 30.000 22.000 11.000
prevăzută
Patterns of 10 6 - - -
5000
Patterns of 20 10 - - -
2000
Patterns of - 7 5 2 1
1000
Patterns of - - 10 10 5
500
Patterns of - - 150 100 50
100
Patterns of - - 100 100 50
50

1. Our Prices workshop assignment to the company I & A and target cost of the
workshop
Annex 1 allows expression workshop assignment price of the company I & A,
depending on the selling price to distributors.
The price of the transfer to the company I & A = 60% of the selling price to distributors.
The selling price to distributors = selling price without taxes - distributors margin =
Sales price without tax (1-rate margin).
It is known that the studio wants to obtain a margin of 10%. therefore,
Target cost = price of assignment to I & A - Margin = 90% price transfer to I & A.

Tabel 7: Annexe 7 – Prices, costs

M1 M2 M3 M4 M5
Pattern

The selling price without taxes 163,170 233,025 309,690 454,470 604,740
Margin rate 25% 25% 50% 50% 50%
Transfer price to distributors 122,378 174,769 154,845 227,235 302,370

The price of assignment to I & A 73,427 104,861 92,907 136,341 181,422

Target Cost 66,084 94,375 83,616 122,707 163,280
Estimated Cost 61,515 79,920 128,310 153,165 135,345

461
2. Comparison between target costs and estimated costs
Product comparison shows that M3 and M4 models had a higher estimated cost target
cost. We must seek paths to reduce the estimated cost of these two luxury models.
Annexes 2, 3, 4, 5 and 6 allow to obtain the following tracks:
- Complexity models (handling time sewing machine);
- Working materials;
- Small series production.
Specifically, the company must produce models M3 and M4 in larger series and
reduce their complexity (number of reference materials, number of manipulations
during sewing machine).
Objective cost method ensures continuous improvement of product costs and
therefore, particularly important if we consider the highly dynamic competitive
environment in which firms operate.

Conclusion:
Directly or indirectly, accounting and cost analysis plays an important role in strategic
decisions, the basic tool of strategic piloting of the company.
After all, modern methods of calculation and analysis of costs, are part of a larger
whole strategy aimed at the market, production management, human resources
management, enterprise relationship with his environment, following a new trend
called "simultaneous engineering ".

Bibliography
Alazard, C., Separi, S. (1998) Controle de gestion, Manuel Aplications, 4 ed, Dunod,
Paris;
Chadwick, L. (1998) Contabilitate de gestiune (traducere), Ed. Teora, Bucureşti;
Dayan, A. (coordonator) (1999) Manuel de gestion, vol. I şi II, AUPELF–UREF, Paris;
Drăgan, C.M., (1980) Calculaţia costurilor, Ed. Academiei, Bucureşti;
Einstle, J.C. (1991) Gestion de l’entreprise. La comptabilité analytique, Ed.
Economica, Paris;
Epuran, M., Băbăiţă, V., Grosu, C. (1999) Contabilitate şi control de gestiune, Ed.
Economică, Bucureşti;
Mévllec, P. (1995) Le calcul des coûts dans les organisations, Ed. La Découverte,
Paris;
Niculescu, M. (1997) Diagnostic global strategic, Ed. Economică, Bucureşti;
Niculescu, M. (2003) Diagnostic economic, Vol. I, Ed. Economică, Bucureşti;
Niculescu, M. (2005) Diagnostic financiar, Vol. II, Ed. Economică, Bucureşti;
Niculescu, M., Lavalette, G. (1999) Strategii de creştere, Ed. Economică, Bucureşti;
Pârvu, F. (1999) Costuri şi fundamentarea deciziilor, Ed. Economică, Bucureşti;
Stancu, I. (1997) Finanţe. Teoria pieţelor financiare. Finanţele întreprinderilor. Analiza
şi gestiunea financiară, Ed. Economică, Bucureşti;
Toma, M. (2013) Fundamentele diagnosticului global-strategic, Ed. Bibliotheca,
Târgovişte.

462