Target Costing and its Application

This assignment delves into the concept of target costing, a proactive approach used by businesses to determine the ideal cost for a product or service before it is launched. It examines the objectives and advantages of implementing target costing, exploring its role in achieving competitive pricing and profitability. The process of target costing is detailed, including market analysis, product design considerations, and cost breakdown strategies. Students are expected to demonstrate their understanding of target costing's principles and its practical implications in real-world business scenarios.

Accounting for Strategic Management
and Control

Table of Contents
1) Introduction.................................................................................................................................1
2) Content on:..................................................................................................................................1
a) How Balance score card may help in performance management......................................1
b) Implement the use of Balance score card across FCH.......................................................2
c. Potential difficulties that company will face in choice of performance measures.............3
d) Elaborate further on likely difficulties the interpretation of performance measures.........4
3. Conclusion...................................................................................................................................5
4. Part 2 Tuition block.....................................................................................................................6
a. Applying the concept of target costing and compute gap...................................................6
b. Suggesting the manner through which company can minimize the cost gap.....................8
c. Discussing the pricing method which is highly appropriate for GPL................................8
A. Discussing the differences that takes place between internal and external cost failure....8
b. Identifying the significant risks that are facing by CP.......................................................9
5. Conclusion........................................................................................................................10
References......................................................................................................................................11

1) Introduction
In the business unit, strategic management and control is highly required to attain success
in the competitive arena (DRURY, 2013). Cost is one of the main factors that closely influence
the profit margin of firm. Hence, it is highly required for the firm to exert control on cost level
by employing suitable tools and techniques (Simons, 2013). Hence, cost control techniques are
highly significant which in turn helps in enhancing profitability aspect to a great extent. Further,
strategic management aspect is highly associated with making effectual use of financial
resources through the means of sound framework. Thus, by framing highly competent strategies
and policies business unit can get desired level of outcome or success. The present report is
based on different case situations which will develop understanding regarding the concept of
balance scorecard, target and other costing methods. Report will shed light on the manner
through which cost gap can be reduced by the firm to significant level (Rothaermel, 2015).
2) Content on:
a) How Balance score card may help in performance management
Balance score card is the essential tool that supports the organization in measuring their
performance. It is the semi standard structured report that supports the managers in tacking the
execution of all activities which are related to the business operations. The main characteristics
of the balance score card is that it focuses on the strategic agenda and selects the small data items
in order to monitor the overall performance of the all activities (Simons, 2013). It is the tool
which acts as closed loop controller that is applied by the management of the organization in
order to compare the actual performance of the company with expected performance. It is the
kind of semi standard structured report which is used by the management of FCH in tracking the
execution of each activity and making control over them. Managers of cited firm can monitor the
activities and can take necessary action on time to reduce consequences (DRURY, 2013).
Balance scorecard is the strategic planning tool that splits the essential activities into four parts;
financial, customers, operational and people. These four perspectives give clear path to the FCH
firm in implementing the action plan . Balance score card is the great tool through which
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company can align its day to day business operations and can make effective strategy in order to
accomplish its goal soon. It helps in measuring the overall business performance so that
drawback and strength can be identified, it helps in making strong strategy for the growth of the
FCH (Hiebl, 2014).
b) Implement the use of Balance score card across FCH
Balance score card is the business approach that helps the FCH in making coordination
with the business operations so that resources can be utilized effectively and wastage can be
minimized. It helps in improving the efficiency of the FCH and assist the organization in
improving its operations. When this tool applies in the finance department then company can get
to know about return on investment, cash flow and financial results (Simons, 2013). By this way
it can identify whether the investment would be profitable for the organization or not. By this
way company can measure its performance and can take sound decisions which can assist in
improving the business performances. When it is applied in the sales operations then FCH can
evaluate the delivery performance to consumers, quality performance, customer retention,
customer satisfaction level with the help of balance score card. In this tool management level,
people score the each activity and measure their level in the organization. Hat helps them in
identifying the loop fall in the system so that they can improve the issues soon. By this way cited
firm can enhance t its brand reputation and can deliver quality services to the target audience
(DRURY, 2013).
Balance score card plays an important role in managing the future growth of an organisation. It
measures that the goals been set up by the company have been met or not. Based on the needs
and deeds of the company, balance score card is set up. It also helps to measure the capabilities
of the workforce and get the work done according to it.
FCH faces the difficulties in establishing the mechanism but with the help of this balance
score card cited firm can get to know that whether modified process will be able to achieve the
goal of the company or not. So according its evaluate the situation and implement the activities
significantly Balance score card is the great tool that find out the drawback in the current process
and modify the existing procedure in such manner so that overall goal of the entity can be
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achieved. It is the great tools through which FCH can reduce the time frame works and can
utilize its resources well. With the help of this mechanism, cited firm can improve its decision
making and can take better decisions. That supports in increasing the overall performance of the
business. With the help of balance score organization will able to get the full picture of the
organisation and organization structure. It will help in taking immediate step in case of crisis and
will help to measure uncertainties, to some extent, beforehand. It drives a business towards
learning its future perspectives and research on various other growth aspects of business. It will
basically pushes a business to tremendous growth.
Managers of the cited firm can cross check whether their consumers are satisfied or not.
For analysing their satisfaction level they can ask question with them regarding services and
quality of the FCH. That helps them in knowing the drawback and they can take immediate
action to resolve the issues. In addition, to this, through balance score card managers of FCH can
look upon the critical internal operations of the organization that will give them clear picture of
the internal workplace environment (DRURY, 2013). With the help of balance score card cited
firm can measure the level of performance of the FCH and managers can discuss the critical
issues with the higher authorities. That will support in making good plan and it will enhance
overall productivity and profitability of the corporation (Hiebl, 2014).
c. Potential difficulties that company will face in choice of performance measures
FCH is planning implementing balance score card in the organization for
measuring the performance of the cited firm. But cited firm can face number of difficulty which
are discussed as below:
Lack of efficient data
If FCH implements the balance score card in the workplace then it may be possible that it
would not get relevant information from the reliable sources (Bauer and Matzler, 2014). On
other hand if data collection takes too much time and energy then they will not be captured
significantly (Bauer and Matzler, 2014). By this way cited firm will not be able to make good
planning for improving the performance of the entity. Due to lack of information organization
can not understand the reason of poor performance that is why it fails to make improvement in
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its process. Performance measurement is an essential tool that can helps in identifying the
mistakes in the current process and can help in improving the performance. But due to lack of
efficient data FCH fails get to know about actual mistakes in the current operation thus, it creates
problem for the organization in improving its business performance to great extent.
Getting lost in the mechanics of tracking
Absence of auto motion in recording and rolling up the results can create difficulty for
the FCH and by this way it will not be able to implement it effectively (ArAs, 2016). That is the
big problem because due to this it will not be able to track the activities and coordination will get
affected (ArAs, 2016). It is another issue for the FCH because of that cited firm is unable to
measure the overall performance, if it improves its process of tracking them it can help in
measuring the performance in appropriate manner. FCH is unable to track the mechanism t hat is
the major issue faced by the entity now days. It is the big problems because in the absence of
proper monitoring cited firm can not be able to identify the loop fall so it can not take necessary
actions to improve its performances. Tracking, monitoring are the essential part of the business
operations so that if there is any loop fall then company can take immediate action to improve
this. But in the absence of proper tracking cited firm will not be able to resolve its issues soon.
d) Elaborate further on likely difficulties the interpretation of performance measures
Cascading to individual level
For implementing the balance score card in the workplace, it is essential that staff
members if FCH put their heart and mind in it. They be commitment to the set targets. If
employees so not engaged with each other well then actual performance will not be measured by
the managers of cited firm. One of the best remedy for this difficulty that to enhance engagement
among team members and enhance their participation. That will help in successfully
implementing the balance score card in the workplace (Jeston. and Nelis, 2014). For working
well it is very important that employees and other staff put their best efforts but due to absence of
cascading to individual level company can not measure its performance that can give loss to the
entity to run its operations smoothly.
Adoption rate
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It is another difficulty which can be faced by the FCH in performance measurement. If
company is unable to adopt the necessary action then it may cause the difficulty to the
organization and it will not be able to improve its condition soon. If cited firm is not choosing
the appropriate technique to measure the performance then it would be difficult to implement the
strategy in the workplace. It will waste the resources and time of the organization and cited firm
will not be able to accomplish its goal significantly (DRURY, 2013).
Absence of integration
It is another difficulty that FCH can face which measuring the performance of the
organization. Balance score is the tool that helps in measuring the overall performance of the
organization, but it is essential that company integrate all activities and accordingly it makes
strategic planning. All structure, culture, resources and execution need to be aligned. But if there
is absence of integration them it may create problem for the FCH and cited firm will not be able
to identify the draw back in the system (Bauer and Matzler, 2014).
Ratios based on the book value
It is another difficulty which is faced by the FCH in relation to choosing the performance
measures. Because managers look at the rations which are reflected through he financial
statement. These all rations are based on the historical data and define the financial health of the
entity. But with the help of this ratios company can not measure its existing loop fall. It can
assume the thing which may be wrong but actual mistake can not be identified by the
organization by this method (Jeston. and Nelis, 2014). It is the major difficulty for the FCH and
that is why cited firm face difficulty and is unable to improve its loop falls accordingly.
3. Conclusion
From the above report it can be concluded that balance score card is the greatest tool that
supports entities in measuring their performances. With the help of this techniques manager can
identify drawback in the system and can improve the condition. But measuring is not an easy
task because managers have to face difficulties like lack of efficient data, Getting lost in the
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mechanics of tracking. So it is required to monitor the activities closely so that individual can
evaluate the performance of the workplace and can take necessary action to improve it.
4. Part 2 Tuition block
Question 1
a. Applying the concept of target costing and compute gap
Target costing may be defined as a approach which is used by the business organization
for setting suitable framework on the basis on price which exists in the market. For setting
suitable target level or cost profit margin is also considered by an entity (Bauer and Matzler,
2014). The rationale behind this firm can attain high profit margin only when it keeps low cost
level in line with the target assessed (Sakas, Vlachos and Nasiopoulos, 2014). Formula of target
costing method varies according to the different situations. On the basis of cited case situation,
Greenie Pte Ltd produces widgets and wishes to earn 20% profit margin. Thus, by undertaking
the following formulas business entity of GPL can determine the cost level is as follows:
When profit margin is based on selling price
Target cost = selling price-(profit% * selling price)
When profit margin is based on unit cost
Target cost = selling price * (1 + profit %)
Computation of target cost
Particulars
Amount
(in $)
Raw material 12
Direct Labor 7
Packaging 9
Royalties 10
Variable production overhead 5
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Total cost 43
Market or selling price 50
Target cost (on the basis of unit cost) 41.6667
Target cost (on the basis of selling
price) 40
Cost gap:
Difference between actual and budget cost are called as cost gap.
Estimated selling price=$50
Target profit required=20 % of estimated selling price
Estimated cost= $43
Target cost= Estimated selling price- target profitability $50-(20%*$50)=$40
Target cost gap=estimated cost-target cost-accounting=$43-$40=$3
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Illustration 1: target costing process
Source: (Target Costing: Definition, Objectives and Advantages, 2017)

b. Suggesting the manner through which company can minimize the cost gap
Cost gap can be defined as estimated cost less target cost. It is found that cost gap in the
Greenie Pte Ltd found on the basis of unit cost 1.34 and on the bases of selling price it is found
10 (Ratnatunga, Tse and Wahyuni, 2015). It can be suggested that GPL needs to reduce number
of components from the system and should use standards components so that it can increase
sales volume. It should hire cheaper but skilled staff members those who are able to perform
their work well. Further more cited firm can also use advanced technologies for improving its
quality of production that will satisfy the consumers thus, sales and cash inflow will get
increased to great extent, by this way cost gap will be eliminated. In addition, cited firm is
required to review the supply chain system so that it can get quality raw material that will
enhance demand thus revenues will get increased and overall cost gap will be minimized (Bauer
and Matzler, 2014).
c. Discussing the pricing method which is highly appropriate for GPL
From the scenario it is found that Cost based transfer prices are not appropriate for the
BPL because it was unfair as it did not incentivise the GPL and due to this market position of the
cited firm get affected. Transfer pricing mechanism is appropriate for the entity it will help in
gaining high revenues from the transaction and it will reduce its cost too. Apart from this, this
method does not consider the competitive market so due to this cited firm got failed to sustain in
the market. It can be suggested that GPL should use the marginal cost plus pricing method. That
will help the cited firm in making effective short term decision making for the development of
the entity (Sakas, Vlachos and Nasiopoulos, 2014). With the help of this method GPL can know
break even point and can keep prices accordingly, it will help in increasing profit of the
company. In the stock valuation are not being destroyed so cited firm will be benefited by this
way and it will be able to sustain in the competitive market for longer duration (Schaltegger and
Burritt, 2014).
Question 2
A. Discussing the differences that takes place between internal and external cost failure
Internal and external failure cost is highly associated with the products or services which
are offered by the manufacturer. Hence, internal failure costs are the one which business unit
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incurs for the removal of defects (Stead and Stead, 2013). In this, company detects all the defects
and thereby take action for improvement before product is provided to end customers. Cost of
rework, rejected products, scarp etc. is the examples of internal cost failure. On the other side,
external failure cost implies for the one that is incurred by the due to selling of unexpected
products or services. Hence, warranty, replacement cost, payment for damages, loss of brand
image etc. Cited case situation presents that Charlie Pharmaceuticals (CP) faced negative press
due to the drugs pricing policy setting down by it (Stead and Stead, 2013).
Hence, pharmaceutical products are highly associated with the health aspect of
individual. Thus, if business unit fails to supply quality medicines then it may result into loss of
brand image and market share (Stead and Stead, 2013). Further, due to the disappointment in
relation to applying appropriate quality control technique or process internal cost failure occurred
(Burkert and Lueg, 2013). Thus, external cost failure has direct impact on internal aspects to the
significant level.
b. Identifying the significant risks that are facing by CP
Major risk which CP will face are discussed as below:
 Financial risk: At the time of recall of drugs, CP can face economic risk because it will
have to put extra cost for improving the products. Because due to this many investors will
bring back their money from the CP that will be loss for the entity and it will affect its
market share to great extent (Target Cost Gap, 2017).
 Operational risk: At the time of recall unexpected failure in the operation will have to be
beard by the CP.
 Reputation risk: It is another difficulty which will have to bear by the CP by recall
because consumers will lose their trust from the cited firm. It will affect its sales volume
to great extent (How to reduce Target Cost Gap?, 2011).
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5. Conclusion
From the above report, it has been concluded that negative press or publicity in relation
to the cost aspect places bad impact on the brand image of CP. Hence, by considering the cost
control tools and techniques risk level can be minimized by Charlie pharmaceuticals.
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References
ArAs, G., (2016). A handbook of corporate governance and social responsibility. CRC Press.
Bauer, F. and Matzler, K., (2014). Antecedents of M&A success: The role of strategic
complementarity, cultural fit, and degree and speed of integration.Strategic management
journal. 35(2). pp.269-291.
Burkert, M. & Lueg, R., (2013). Differences in the sophistication of Value-based Management–
The role of top executives. Management Accounting Research. 24(1). pp.3-22.
DRURY, C. M., (2013). Management and cost accounting. Springer.
Hiebl, M. R., (2014). Upper echelons theory in management accounting and control
research. Journal of Management Control. 24(3). pp.223-240.
How to reduce Target Cost Gap?, 2011. [Online] Available through: <http://managerial-
accounting.blogspot.in/2012/12/how-to-reduce-target-cost-gap.html>. [Accessed on 15th
May 2017].
Jeston, J. & Nelis, J., (2014). Business process management. Routledge.
Ratnatunga, J., Tse, M. S. & Wahyuni, D., (2015). Societal Role Expectations of Management
Accounting Professionals: An Australian Study. In Advances in Management
Accounting (pp. 29-48). Emerald Group Publishing Limited.
Rothaermel, F. T., (2015). Strategic management. New York, NY: McGraw-Hill.
Sakas, D., Vlachos, D. & Nasiopoulos, D., (2014). Modelling strategic management for the
development of competitive advantage, based on technology. Journal of Systems and
Information Technology. 16(3). pp.187-209.
Schaltegger, S. & Burritt, R., (2014). Measuring and managing sustainability performance of
supply chains: Review and sustainability supply chain management framework. Supply
Chain Management: An International Journal. 19(3). pp.232-241.
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