Problems of Target Costing in accounting practice

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Though the target costing system results in clear, substantial benefits in most cases, it has a few problems that one should be aware of and guard against. These problem are as follows :

1. The development process can be lengthened to a considerable extent since the design team may require a number of design iterations before it can devise a sufficiently low cost product that meets the target cost and margin criteria. This occurrence is most common when the project manager is unwilling to “pull the plug” on a design project that cannot meet its costing goals within a reasonable time frame. Usually, if there is no evidence of rapid progress toward a specific target cost within a relatively short period of time, it is better to either ditch a project or at least shelve it for a short time and then try again, on the assumption that new cost reduction methods or less expensive materials will be available in the near future that will make the target cost an achievable one.

2. A large amount of mandatory cost cutting can result in finger-pointing in various parts of the company, especially if employees in one area feel they are being called on to provide a disproportionately large part of the savings. For example, the industrial engineering staff will not be happy if it is required to completely alter the production layout in order to generate cost savings, while the purchase staff is not required to make any cost reductions through supplier negotiations. Avoiding this problem requires strong interpersonal and negotiation skills on the part of the project manager.

3. Representatives from number of departments on the design team can sometimes make it more difficult to reach a consensus on the proper design because there are too many opinions regarding design issues. This is a major problem when there are particularly stubborn people on the design team who are holding out for specific product features. Resolving out is difficult and requires a strong team manager, as well as a long-term commitment on the part of a company to weed out those who are not willing to act in the best interests of the team.

For every problem area outlined have the dominant solution is retaining strong control over the design teams, which calls for a good team leader. This person must have an exceptional knowledge of the design process, good interpersonal skills, and a commitment to staying within both time and cost budgets for a design project.

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