Discuss About Standard Costing And Target Costing

Running head: MANAGERIAL ACCOUNTING
Managerial Accounting
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Abstract 3000
The report presents a clear idea about the standard costing and target costing that the
organizations have implemented. Two articles that have been selected for this assignment for
the standard costing and target costing, one is Standard costing insights from leading
companies February 2010 KPMG study and the other article that has been selected for target
costing is “2008 the influence of time- to- market and target costing in the new product
development success Paulo Afonso, Manuel Nunes, Anto'nio Paisana, Ana Braga”. The
implications of the costing that the articles have are explained in this report and also how
does it helps the higher authority/management in decision making are explained here. A
recommendation has been provided in which two of the system of costing has been provided
are explained for the organizations.

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Table of Contents
Introduction................................................................................................................................3
Features of Standard Costing in Management.......................................................................3
Relevance of Standard Costing as a planning and control system.............................................4
Target costing and its difference with Standard costing............................................................5
Relevancy of target costing in today’s competitive business environment...............................7
Features of target costing.......................................................................................................8
Implementation of the Standard Costing....................................................................................8
Implementation of the Target Costing.....................................................................................10
Recommendation and Conclusion............................................................................................12
References................................................................................................................................13

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Introduction
This section of the research will provide the potential sources to be used to review the
report which is available in relation to good and efficient systems of cost management. The
section will discuss the different definition of standard costing in management. The main
focus of the section will explain the different characteristics of Standard Costing. The relation
to the needs of understanding the standard costs, their planning and possible control system
are also addressed and reviewed in this section.
Features of Standard Costing in Management
This section will provide a discussion in relation to the features of Standard Costing
as a good and efficient tool of planning and controlling measures. According to CIMA, the
UK’S (Chartered Institute of Management Accountants) defines standard costing as “control
technique that reports variances by comparing actual costs to pre-set standards so facilitating
action through management by exception.” Also in addition “standard cost is a carefully
predetermined unit cost which is prepared for each cost unit (Eisenberg 2016). It contains
details of the standard amount and price of each resource that will be utilized in providing the
service or manufacturing the product.”
The following advantages are stated from Standard Costing serving as an effective
and efficient managerial technique for Planning and Control System in an organization:
 Acts and serves in the planning stage to the management by providing them with the
formulating prices, production policies, cost-reduction policies, variance detection
policies leading to effective control system in the management (Cooper 2007).
 Evaluation and accelerating employee’s performance by following set up “Standard” to
reach the overall organisational goal.

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 Helping the management in smooth functioning of operations, valuation of work-in-
progress inventory, finished goods
 Helps the management to adopt various corrective measures and take decisions (fixation
of price, make-or-buy decisions) which are beneficial to the organisation.
 It aids to management tool for efficient an effective planning, coordinating and
controlling various operational activities.
Relevance of Standard Costing as a planning and control system
In this section, a comparative study between the standard costs set by Lion and the
actual costs has been done. In December 3, 2019 Lion had ordered 1000 liters of
preservatives at 3.90 dollars per liter. On December 7, 2019 Lion gets delivery of the 1000
liters and a bill of 3900 dollars has been made. These 3900 dollars is the actual cost. On
December 7, 2019 Lion got ownership of the 1000 liters of preservatives and becomes liable
to pay to its distributor. On December 7, 2019 lion updates its Direct tangible stock to 4000
dollars (Farkas, Kersting and Stephens 2016). This contrast between the actual cost and
standard cost is credited to Direct tangible cost difference. This 100 dollars credit to the cost
difference means that the company has lower real cost than the standard cost estimated.
In March, Lion had ordered 4000 liters of preservatives at 4.05 dollars per liter. On
April 1, 2019 Lion got delivery of the 4000 liters of preservatives and a bill amount of 16,200
dollars was made. But Lion updated its due account to 16,350 dollars (Tsai, Lan and Huang
2019). This contrast of 150 dollars is debited to Direct tangible cost difference. In this case,
the direct standard cost estimation is more favorable.
After combining both these transaction, it is found that the debit side will show 50
dollars. This balance is unfavorable as in this case the real cost is greater than the standard

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cost. This mean the company will have to absorb the 50 dollars in some way or it will have to
bear 50 dollar lesser gain.
On July 3 Lion got delivery of 4000 liters of preservatives at a real cost of 3.92 dollars
and bill amount of 15,680 dollars was made. The bill amount had a due date for 30 days.
Direct tangible stock is deficit for a standard cost of 15,920 dollars. Accounts due is credited
for 15,680 dollars. The contrast of 240 dollars is put to credit side as Direct tangible cost
difference (Maskell, Baggaley and Grasso 2017). This difference indicates that the real cost is
less than the standard cost.
After recording of this balance, Direct tangible cost difference was seen to have
overall financial standing of 190 dollars.
Target costing and its difference with Standard costing
Target costing is the cost accounting system where a desired profit is earned by
setting up a fixed desired cost known as target cost, which depicts the price over the
product’s lifecycle. The target cost is ascertained by deducting the gross profit from the
market selling price and if target cost is not achieved changes to be made to the production
methods (Sidorova, Nazarov and Listopad 2019). In target costing, the management uses cost
planning, cost management technique that enables them to determine the cost at the early
phase of the lifecycle. In the later stages if the target is not achieved management performs
cost reduction techniques. The key features of target costing highlighted as follows:
 The management performs cost planning, cost reduction, cost management techniques.
 The target minimum profit margin is included in the targeted market selling price.
 The company cannot determine the product’s own price; they have to abide by the market
selling price.

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The advantage of target costing is that it allows cost optimization, helps in delivering
the product at customer’s desired price that leads to increased customer satisfaction, it
enables the management to control the cost throughout the product lifecycle (Shi 2016).
The disadvantage of target costing is that it can lead to delivery of cheap quality
product since it involves cost reduction in order to achieve the target cost. Target costing
requires co-ordination from various departments which can be time consuming or not
possible in case of big organizations.
Target costing varies from standard costing in following ways:
In standard costing, the cost is pre-determined based on the conditions prevailing in
the organization, whereas in target costing the target cost based on the prevailing market
conditions.
In target costing, the cost is arrived at by reducing the gross profit from sales and then
compared with target cost, whereas in standard costing, all the costs of material, labour,
overhead, are added together to arrive at the standard cost (Steyn 2017).
In standard costing, the actual costs are compared with the standard costs to ascertain
the variances, which can be favourable or adverse. In target costing, there is no such
comparison of actual and budget cost.
In standard costing, the standards are revised annually with respect to the actual costs
and in target costing, there is a continuous cost reduction process to meet the target cost
(Clifton et al. 2019).
The target costing lays emphasis on a proactive approach to pricing, whereas standard
costing takes into consideration administrative, distribution costs as well.

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Relevancy of target costing in today’s competitive business environment
Target Costing is an efficient tool which can reduce the costs of a product effectively,
throughout the life cycle of a product before the production actually begins. Every process of
manufacturing a product goes through the targeted costing process (Bock and Pütz 2017). it is
important to ascertain the costs of a product at all times of production as the costs in
production happen during the designing of the product.
Successful manufacturing giants like Nissan, Sony Corporation have always strived
for target costing procedures and have been equally successful in customer satisfaction. As
opposed to the Standard Costing method which heavily relies on various estimates based on
administration, marketing and distribution costs, Target based costing relies on a proactive
approach to pricing of a product (Gonçalves, Gaio and Silva 2018). Costs are planned early in
the introductory phase, instead of performing cost allocation in the latter stages.
TARGET COSTING AT A GLANCE
Design product according to features
Determining desired profit
Deriving Target Costs
Release the finished product whilst taking care of Target Costs

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Features of target costing
The two most important approaches to Target Costing are namely Value Engineering
and Value Analysis. Value Analysis is defined as a crucial apparatus to seek improvements to
a product by reducing costs to meet its productivity in the long run. On the other hand, Value
Engineering can be defined as the ascertainment of value to cost ratios and to improve the
quality of the product with skilled expertise and the general assessment of product functions
(Ahn, Clermont and Schwetschke 2018). Both are interrelated in a way as the product has to
be designed and manufactured catering to the consumer and the market needs so as to meet
the lowest possible costs involved.
Implementation of the Standard Costing
In analyzing the article, which has been made by the KPMG is upon the standard
costing and how the organizations implemented that at the time of operations. The economic
crisis does plays a main role, and does it is important for the organizations to make certain
changes in their cost structure. The organization does use the underlying costs at the time of
budgeting and through this the standard cost has been made (Potkány et al. 2017). Most of the
COST REDUCTION/COST MANAGEMENT
EMPHASIZING ON CUSTOMERS AND
PROFITABILITY
SETTING PROFIT MARGINS
FIXATION OF TARGET SELLING PRICE

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organizations does use the standard costing and variances at the time of valuing the inventory
and also for the statutory purposes. It further helps in the purpose of management reporting
and also for performance measurement. Some of the organization does highlight the uses of
the standard costing, which has been discussed below:
 Standard costing does use as a decision making tool in the organizations.
 At the time of making the global methodologies, the variances and standard costs has
been compared to get the desired results.
 With the help of this costing, there has been investment in governance and organization,
so that it helps in maintaining the right balance which is between the efficiency and
insight.
 It is always important to understand to key components that are required for the purposes
of costing so that it can be used fully.
 There is an increase in the economic volatility which does help in leading more updates
on the process of standard costing.
 The policies and practices that has been followed related to the overhead absorption will
vary on the standard costing.
 This process of costing, does use as the aspirational performance targets which will help
in ensuring that this will not lead to any efficiency.
 The effective management process does helps in focusing the controllable costs.
The article is based on the research which has been done by KPMG in the region of
United Kingdom, and there has been involvement of 12 largely Fortune 500 manufacturing
groups (Lima et al. 2016). There were certain definitions that has been assumed for the
standard costing, one if the cost allocation, through which at the time of production the cost
has been allocated in different areas. Another one is cost absorption, in which it states that
there have been the costs which is based on the production activities.

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In summarizing the standard costing, the organizations do use it as a financial tool
which is often used in determining the profitability. It is considered as a wider framework
which also help in the business intelligence and through this the organizations use it in
seeking the performance and competitiveness. It does provide the right information that has
been delivered to the right people, at the right time and also provide information about the
right strategies and the operations that can be connected through improving the strategic
competiveness (Shimizu 2018). The firms which KPMG use to audit does have the business
intelligence of multiple layer. It has been found sometimes that there have been certain issues
in which the organization does get affected on a sustainable basis.
Implementation of the Target Costing
The article that has been selected upon the analysis of target costing is on the success
of the new product development. The target costing has been used for testing the relationship
between the time and cost of product development and the use of product development which
the organizations does practice. The data that has been provided is from the market survey of
Portuguese. As there has been emergence of the process of innovation, it has been throughout
the leading organizations in that region. If there is a reduction in the NPD cycle, these can
create a real advantage in the market share, profit, and long term competitiveness. The cost
management does helps in production phase and also in the stages of product development
which will help the firm in earning the larger profits as there has been reduction in the costs
that acts as an advantage from the first unit. Moreover, in the development stage there has
been help of the cost reduction and managing costs which resulted in a cheaper way than
usual. Thus, it helps in managing the overall costs of product development and it is
considered as an important step on increasing the profitability of the products that will be
manufactured in future. The goal of using this process of target costing is that it helps in the

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market oriented product, and helps in reduction of lead time for the product development
stage. One of the first organization to implement the target costing at the time of production
purpose is Toyota, in the year 1960. After the target price is identified, then the target margin
has been assumed and the target cost has been calculated by subtracting the target margin
from the target price. There is also implication of the Value engineering and functional costs
that are usually used in the time of eliminating the excess of the manufacturing cost which is
used currently over the allowable cost.
The target costing does help in the new product development, where the organizations
can use their efficiency and does improve at the time of launching the new products, through
which they can double up their bottom line. It is one of the essential area, through which
there is an opportunity for the organizations in improving the product. There has been
extraction of the successful projects that has been seen on implementing the target costing.
There are certain factors that has been proposed which have some difficulty in generating the
common sets of CSFs for NPD. There are certain determinants in the performance of new
product, which has been found in the study upon the identification of the factors. There are
some different factors and methods that has been used to get the desired results, but
sometimes it can be seen that it has been inconsistent or even it does have contradictory with
the other studies that has been resulted. Generally, there is focus which will help in successful
NPD, which includes;
 Support of the top management for the purpose of innovation.
 Competence and coordination in manufacturing, marketing and R&D.
 There should be involvement of the suppliers and customers at the time of designing the
product.
 Nature of the market.
 Development time.

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Another factor that is considered important is time-to-market. As in global market,
there is competition of high level through which there is certainly a big scope for the process
of innovation. With the faster product development, it also helps in superior performance of
the organization. There is also a competitive advantage which every organization will enjoy
with the process of innovation.
Recommendation and Conclusion
Upon the analysis of the articles related to the target costing and standard costing, it
has been use by the organizations for the development of the new products, or for the purpose
of innovation. Two of the process that can be recommended for the organizations that use the
standard and target costing are job costing and process costing. With the help of these costing
process, the organizations will help in the projection of profit and also for cutting the costs at
the time of production. It will further help in allocation of people at the time of operations,
through job costing. Thus, these system of costing will help in the development of product
and also at the time of innovating the product.

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References
Ahn, H., Clermont, M. and Schwetschke, S., 2018. Research on target costing: past,
present and future. Management Review Quarterly, 68(3), pp.321-354.
Bock, S. and Pütz, M., 2017. Implementing Value Engineering based on a
multidimensional quality-oriented control calculus within a Target Costing and Target
Pricing approach. International Journal of Production Economics, 183, pp.146-158.
Clifton, M.B., Townsend, W.P., Bird, H.M. and Albano, R.E., 2019. Target costing:
market driven product design. CRC Press.
Cooper, R., 2017. Target costing and value engineering. Routledge.
Eisenberg, P., 2016. Implications of Standard Costing System in Manufacturing: A Case
Study. Journal of Applied Management and Investments, 5(3), pp.162-165.
Farkas, M., Kersting, L. and Stephens, W., 2016. Modern Watch Company: An
instructional resource for presenting and learning actual, normal, and standard costing
systems, and variable and fixed overhead variance analysis. Journal of Accounting
Education, 35, pp.56-68.
Gonçalves, T., Gaio, C. and Silva, M., 2018. Target costing and innovation-exploratory
configurations: A comparison of fsQCA, multivariate regression, and variable cluster
analysis. Journal of Business Research, 89, pp.378-384.
Lima, A.C., Silveira, J.A.G.D., Silva, S.H.F.D. and Ching, H.Y., 2016. Target costing:
exploring the concept and its relation to competitiveness in agribusiness.

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Maskell, B.H., Baggaley, B. and Grasso, L., 2017. Practical lean accounting: a proven
system for measuring and managing the lean enterprise. Productivity Press.
Potkány, M., Novák, P., Kováč, R. and Hitka, M., 2017. Innovation of a Technological
Product with Utilizing the Target Costing Methodology. International Review of
Management and Marketing, 7(2), pp.130-137.
Shi, Y., 2016. LEANING AWAY FROM STANDARD COSTING. Strategic
Finance, 97(12), p.38.
Shimizu, N., 2018. The Innovation Mechanism in Target Costing. THE INSTITUTE OF
COMPARATIVE ECONOMIC STUDIES HOSEI UNIVERSITY, (32), pp.3-12.
Sidorova, M., Nazarov, D. and Listopad, E., 2019, November. Standard costing: first
steps in the USSR (1930-1934). In Third International Economic Symposium (IES 2018).
Atlantis Press.
Steyn, E., 2017. An evaluation of a standard costing framework to manage transport
costs for a South African logistics company (Doctoral dissertation, North-West University
(South Africa), Potchefstroom Campus).
Tsai, W.H., Lan, S.H. and Huang, C.T., 2019. Activity-Based Standard Costing Product-
Mix Decision in the Future Digital Era: Green Recycling Steel-Scrap Material for Steel
Industry. Sustainability, 11(3), p.899.

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