Cost Concepts and Target Costing - Desklib

This article discusses cost concepts and target costing in two parts. Part 1 explains fixed, variable, and mixed costs prevalent in companies, with examples from EEC. Part 2 discusses target costing as a measure to ascertain a product's cost and how EEC can use it to offer competitive advantage. The article also highlights the advantages and disadvantages of target costing. References are included for further reading.

qwertyuiopasdfghjklzxcvbnmqw
ertyuiopasdfghjklzxcvbnmqwert
yuiopasdfghjklzxcvbnmqwertyui
opasdfghjklzxcvbnmqwertyuiopa
sdfghjklzxcvbnmqwertyuiopasdf
ghjklzxcvbnmqwertyuiopasdfghj
klzxcvbnmqwertyuiopasdfghjklz
xcvbnmqwertyuiopasdfghjklzxcv
bnmqwertyuiopasdfghjklzxcvbn
mqwertyuiopasdfghjklzxcvbnmq
wertyuiopasdfghjklzxcvbnmqwer
tyuiopasdfghjklzxcvbnmqwertyui
opasdfghjklzxcvbnmqwertyuiopa
sdfghjklzxcvbnmqwertyuiopasdf
ghjklzxcvbnmqwertyuiopasdfghj
klzxcvbnmqwertyuiopasdfghjklz
xcvbnmrtyuiopasdfghjklzxcvbnm
qwertyuiopasdfghjklzxcvbnmqw
COST CONCEPTS

Cost
Part- 1
 The journal activity of EEC highlights that three costs namely fixed, variable, and
mixed costs are prevalent. Furthermore, the company’s journal primarily accounts for
raw material inventory, indirect labour, and variable costs. Moreover, these must react
to decrease or increase of expenses in relation to sales volume or production .
Therefore, in the event of decrease or increase in the same within required boundary,
such cost behaviour or revenue level shall remain unaltered.
 Fixed costs do not alter in alignment to several company factors and therefore, these
remain unchanged in comparison to change in company volume. Variable costs
changes when there is an alteration in the company’s production and volume. In other
words, these costs alter directly in alignment with volume. Further, mixed costs are
the costs that incorporate both fixed and variable cost and it is significant to know
how costs will alter with varied activity levels (Horngren, 2011).
EEC’s fixed costs are factory salaries, depreciation costs, indirect labour, factory
insurance, administrative costs, interest costs, and factory property tax. Depreciation
is the tangible asset’s value that deteriorates over its useful life, insurance is a contract
that offers timely payment after a pre-determined tenure, property taxes are paid to
local governments based on asset’s cost, utility factory is the expense of specific
requirements needed in various services namely internet, gas, phone lines, etc.
Further, the variable costs of EEC are expenses related to acquirement of supplies for
the factory (Marsh, 2009). Lastly, mixed costs of the company comprise of
maintenance expenses, selling costs, and utility factory. These costs are not required
to be recognized in the financials of EEC under the GAAP framework and hence,
these can be identified as a utility cost.
 Variable costs rely on sales volume as these relate to labour costs and direct raw
materials. Further, adjustments in the same must be because of changes in quantum of
products. Factory material expenses can either decrease or increase in response to
change in production level. However, fixed costs still incur even if no sales have been
incurred (Hopper & Bui, 2016). These costs remain the same based on specific sales
and production levels and outside such level, these may even change based on sales
volume. Further, unit fixed costs are also reciprocally associated with volume of sales,
thereby meaning that these rises when there is decline in volumes. In contrast to this,
2

Cost
unit fixed costs decline when there is increment in volume as there is redistribution of
costs over additional units (Drury, 2011).
3

Cost
Part-2
Target costing
 Target costing can be explained as a primary measure to ascertain the product’s cost
that is of better quality and operational in nature and that can assist in generating
additional profits at respective selling prices. This costing approach has allowed
companies to attain the requisite amount of resources so that better techniques and
strategies can be facilitated, thereby allowing them to outperform their competitors in
the market (Drury, 2011). Therefore, target costing can be utilized by every
organization in offering several goods and services at the best possible rates that is
generally lowest in nature. Further, this approach also allows managers to adopt and
introduce a system of cost that can assess how the company is being benefitted from
its efficacies.
 In relation to development cycle of goods, EEC can ascertain whether the expected
product cost can facilitate in profit generation. Further, in relation to cost control or
reduction, the same must be facilitated during the design and planning framework of
their goods’ life cycle because product’s cost is generally ascertained here (Drury,
2011). In the first stage, EEC can collect data on various goods through a market
research. This can assist it in determining what products are relevant to consumers,
price payable by them, etc. In the second stage, EEC can endeavour to frame margin
target costs for its goods available for sale. In the third stage, EEC can design its
goods to address the previously mentioned margin target price. The last stage is
associated with improvements or enhancements of products wherein fuller utilization
of resources can be obtained on a whole.
 Target costing can assist in offering competitive advantage to EEC by its cost
planning or reduction measures prior to a product’s development cycle. It can also
assist EEC in incorporating procedures and equipments, material and labour, etc for
completing a product effectively. Further, optimization can assist in minimizing the
time and costs required to produce a good, thereby assisting in moving the goods
rapidly in the market and at a price readily acceptable by the consumers (Brown,
2013).
However, this approach also has some disadvantages that must be pointed out. For
instance, the development procedures in this method is complicated, thereby paving a
4

Cost
path for consumption of additional time. Furthermore, the corporate conflicts related
to target costing are also worth mentioning as these are interrelated with cost cutting
measures associated with the system. Hence, these issues are also a major setback in
the adoption of such system in many corporates.
5

Cost
References
Brown, P. (2013). How can we do better?. Accounting Horizons. 27(4), 855–859. DOI
https://doi.org/10.2308/acch-10365
Drury, C. (2011). Cost and management accounting. Andover, Hampshire, UK: South
Western Cengage Learning.
Hopper, T & Bui, B. (2016) Has management accounting research been critical?.
Management Accounting Research. [online]. vol. 31, pp. 10-30. Retrieved from:
https://pdfs.semanticscholar.org/6ccf/f78a452763f17ed5e4f4ddc6b96703801403.pdf
Horngren, C. (2011). Cost accounting. Frenchs Forest, N.S.W.: Pearson Australia.
Marsh, C. (2009) Mastering financial management. Harlow: Financial Times Prentice Hall.
6