Cognitive mapping the topic of target costing

Cognitive mapping the topic of target costing

Joseph Kim-keung Ho

Independent Trainer

Hong Kong, China

Abstract: The topic of target costing in the subject of Management accounting is complex. By making use of the cognitive mapping technique to conduct a brief literature review on the target costing topic, the writer renders a systemic image on the topic of target costing. The result of the study, in the form of a cognitive map on target costing, should be useful to those who are interested in the topics of cognitive mapping, literature review and target costing.

Key words: Target costing, cognitive mapping, literature review

Introduction

As a topic in Management accounting, target costing is complex. It is thus useful to employ some learning tool to conduct its study, notably for literature review purpose. For a teacher in research methods, systems thinking and management, the writer is specifically interested in finding out how the cognitive mapping technique can be employed to go through a literature review on  target costing. This literature review exercise is taken up and reported in this article.

On the cognitive mapping exercise for literature review

Literature review is an important intellectual learning exercise, and not just for doing final year dissertation projects for tertiary education students. On these two topics of intellectual learning and literature review, the writer has compiled some e-learning resources. They are the Managerial intellectual learning Facebook page and the Literature on literature review Facebook page. Conducting literature review with the cognitive mapping technique is not novel in the cognitive mapping literature, see Eden and Simpson (1989), Eden, Jones and Sims (1983), Open University (n.d) and the Literature on cognitive mapping Facebook page. In this article, the specific steps involved in the cognitive mapping exercise are as follows:

Step 1: gather some main points from a number of academic journal articles on Target costing. This result in the production of a table (Table 1) with the main points and associated references.

Step 2: consolidate  the main points from Table 1 to come up with a table listing the cognitive map variables (re: Table 2).

Step 3: link up the cognitive  map variables in a plausible way to produce a cognitive map (re: Figure 1) on the topic under review.

The next section applies these three steps to produce a cognitive map on target costing.

Descriptions of cognitive map variables on the target costing topic

From the reading of some academic articles on Target costing, a number of main points (e.g., viewpoints, concepts and empirical findings) were gathered by the  writer. They are shown in Table 1 with explicit referencing on the points.

Table 1: Main points from the target costing literature and referencing

Main points from the target costing literature	Referencing
Point 1: "target costing has replaced the question ‘What does a product cost?’ with the question ‘What may a product cost?’ in order to become an economic success in its future market (see Ewert and Wagenhofer, 1997: 306–17). The most obvious example is the subtraction method, an integral part of target costing’s ‘market into company’ approach. Using this method, a target profit is subtracted from the exogenously determined market price to arrive at a total unit cost allowed by the market for a particular product".	Ewert, R. and C. Ernst. 1999. "Target costing, coordination and strategic cost management" European Accounting Review 8(1): 23-49.
Point 2: "... a second aspect of target costing involves its use as a tool to coordinate efforts within the firm to reach the allowable costs. This is accomplished by providing a cost target that must be met by the engineers, in order to make eventual production of the product feasible".	Ewert, R. and C. Ernst. 1999. "Target costing, coordination and strategic cost management" European Accounting Review 8(1): 23-49.
Point 3: "... target costing is considered a strategic management accounting system. This implies that its main focus is on long-term cost management rather than the short-term focus adopted by more traditional cost accounting systems. This is a direct result from the finding that a major portion of a product’s cost is already determined when it is launched in its respective market (see Berliner and Brimson, 1988: 140). Target costing takes this into account by focusing on cost reductions at a stage with plenty of opportunities to influence a new product’s cost".	Ewert, R. and C. Ernst. 1999. "Target costing, coordination and strategic cost management" European Accounting Review 8(1): 23-49.
Point 4: "Target costing is a cost management system for developing products whose profitability is deemed sufficient to justify their production. The strategy underlying target costing is that 80–85% of a product’s life cycle cost is determined during its development stage. Consequently, target costing focuses its efforts on a product’s development since it has the greatest potential for managing a product’s cost".	Kee, R. 2010. "The sufficiency of target costing for evaluating production-related decisions" Int. J. Production Economics 126, Elsevier: 204-211.
Point 5: "Target costing begins with research into the attributes and quality customers want in a prospective product and the price they are willing to pay for these features. The next step involves subtracting the profitability required by the firm to manufacture a product from its market price to determine its target, or allowable, cost. All subsequent efforts of target costing are focused on achieving a product’s allowable cost. If a product’s cost can be achieved, it is produced. Otherwise, the product is rejected as financially infeasible to manufacture".	Kee, R. 2010. "The sufficiency of target costing for evaluating production-related decisions" Int. J. Production Economics 126, Elsevier: 204-211.
Point 6: "Early target costing researchers used survey methodology to examine the attributes of firms adopting target costing. In surveys of Japanese and Dutch firms, Tani et al. (1994) and Dekker and Smidt (2003), respectively, found that the primary reason cited for using target costing was cost reduction. Other reasons frequently cited included improving product quality, achieving timely introduction of new products, and improving communication (Tani et al., 1994; Ellram, 2000). Analysis of target costing firms revealed that they were often in highly competitive markets (Swenson et al., 2003) with high environmental uncertainty".	Kee, R. 2010. "The sufficiency of target costing for evaluating production-related decisions" Int. J. Production Economics 126, Elsevier: 204-211.
Point 7: "The use of cost information and cost management during product design is a subject that receives increasing attention in the accounting literature (Anderson and Sedatole, 1998; Davila, 2000). The main motivation for managing costs during product design is that after the product development stage most costs have been ‘‘designed’’ into the product and during production cannot be influenced (significantly) anymore".	Dekker, H. and P. Smidt. 2003. "A survey of the adoption and use of target costing in Dutch firms" Int. J. Production Economics 84, Elsevier: 293-305.
Point 8: "In relation to this TCM [target cost management] system specific tools were developed such as cost tables, value engineering, total quality management and inter-organizational cost management".	Dekker, H. and P. Smidt. 2003. "A survey of the adoption and use of target costing in Dutch firms" Int. J. Production Economics 84, Elsevier: 293-305.
Point 9: "Central to the target costing concept is ‘‘reverse costing’’, in which an estimation of the attainable selling price and the required profit margin are used to determine the allowable cost for a new product. In the accounting literature this reverse costing mechanism is referred to as ‘‘market driven costing’’ (Cooper and Slagmulder, 1997). This market orientation is an essential characteristic of target costing systems..".	Dekker, H. and P. Smidt. 2003. "A survey of the adoption and use of target costing in Dutch firms" Int. J. Production Economics 84, Elsevier: 293-305.
Point 10: "Target costing is not a new idea, even though only a small number of North American companies fully embrace its elements. Henry Ford developed the first mass-produced automobile, the Model T, in 1908 with the objective of increasing volume by continually lowering its price, and by 1913 was able to sell it for under $500. Obviously, to do that and make money, costs would have to be tightly managed. Ford managed material costs via backward integration, labor costs by the use of the assembly line and efficiency improvements, and other costs by frugal behavior".	Institute of Management Accountants. 1994. "Implementing target costing" IMA Publication Number 98377, Institute of Management Accountants, 10 Paragon Drive Montvale, NJ 07645.
Point 11: "Robin Cooper (1992), for example, says, “The object of target costing is to identify the production cost of a proposed product so that, when sold, it generates the desired profit margin.”..".	Institute of Management Accountants. 1994. "Implementing target costing" IMA Publication Number 98377, Institute of Management Accountants, 10 Paragon Drive Montvale, NJ 07645.
Point 12: "Since target costing is usually applied to new product planning, which frequently requires investments in tooling, equipment, and other assets influencing costs, it can legitimately be said that price drives both costs and investments".	Institute of Management Accountants. 1994. "Implementing target costing" IMA Publication Number 98377, Institute of Management Accountants, 10 Paragon Drive Montvale, NJ 07645.
Point 13: "Target costing originated in Japan in the 1960s, though it remained a secret for years. Since the 1980s, however, when target costing was widely recognized as a major factor for the superior competitive position of Japanese companies, extensive efforts have been made to convey target costing to Western companies".	Feil, P., K.H. Yook and I.W. Kim. 2004. "Japanese Target Costing: A Historical Perspective" International Journal of Strategic Cost Management, Spring: 10-19.
Point 14: "As Monden (1995), for example, states: “Target costing is defined as a companywide profit management activity during the new product development stage that includes: (1) planning products that have customer-pleasing quality, (2) determining target costs (including target investment costs) for the new product to yield the target profit required over the medium to long term given the current market conditions, and (3) devising ways to make the product design achieve target costs while also satisfying customer needs for quality and prompt delivery.”..".	Feil, P., K.H. Yook and I.W. Kim. 2004. "Japanese Target Costing: A Historical Perspective" International Journal of Strategic Cost Management, Spring: 10-19.
Point 15: "Even though the basic concept of target costing has been in existence in Japan for more than 40 years, its application has evolved rather slowly as many companies responded to changes in the external environment. As competition grew fiercer and profits weakened, the use of target costing intensified and companies developed better methodologies".	Feil, P., K.H. Yook and I.W. Kim. 2004. "Japanese Target Costing: A Historical Perspective" International Journal of Strategic Cost Management, Spring: 10-19.
Point 16: "the target costing process is being used for a new product or service. The target costing process begins with developing an understanding of unmet needs in the marketplace, and then determining what customers would pay to have their needs met, the ‘‘target price.’’ Internal goals and pressures determine the profit margin desired. Calculating the allowable target cost is the next step".	Ellram, L.M. 2002. "Supply management's involvement in the target costing process" European Journal  of Purchasing & Supply Management 8, Pergamon: 235-244.
Point 17: "While target costing is at least mentioned in most of the leading purchasing texts today (Burt and Pinkerton, 1996; Dobler and Burt, 1996; Leenders and Fearon, 1997; Van Weele, 2002), it is given very brief exposure - generally less than one page. It is no wonder, given the limited attention to target costing in the purchasing literature, that the purchasing/supply function is given very limited attention in the target costing literature".	Ellram, L.M. 2002. "Supply management's involvement in the target costing process" European Journal  of Purchasing & Supply Management 8, Pergamon: 235-244.
Point 18: "According to the Institution of Chemical Engineers (2007), a target cost contract is defined as “a particular type of cost reimbursement contract in which the contractor is reimbursed his or her costs subject to the application of a formula, which allows the contractor to share in savings made, often called ‘gain share,’ or to contribute towards additional costs incurred, called ‘pain share,’ according to how well the parties are able to manage the cost of the work.”..".	Chan, D.W.M., P.T.I. Lam, J.H.L. Chan, T. Ma and T. Perkin. 2012. "A Comparative Study of the Benefits of Applying Target Cost Contracts Between South Australia and Hong Kong" Project Management Journal 43(2) April: 4-20.
Point 19: "Until now, the focus on TCM [target cost management] was only made for a single product. This is mainly because attention was put on product manager for the development of a single model in the automobile industry".	Okano, H. 1996. "Target Cost Management Strategy and organization in the automotive industry" Draft for 1996 IMVP Sponsors Meeting, Graduate School of Business Osaka City University, Sugimoto, Sumiyoshi, Osaka 558, Japan.
Point 20: "Innovation on core technology is becoming very important in many industries. Logistic strategy including suppliers procurement strategy, and location strategy as well are becoming important in today's competitive environment. Within this framework, TCM [target cost management] has to be extended to include the whole business strategy. It can no longer be limited only to product strategies".	Okano, H. 1996. "Target Cost Management Strategy and organization in the automotive industry" Draft for 1996 IMVP Sponsors Meeting, Graduate School of Business Osaka City University, Sugimoto, Sumiyoshi, Osaka 558, Japan.
Point 21: "Sauers [14] has discussed target costing technique from mathematical viewpoints: The specification limits, derived from the “nominal-is-best” Taguchi loss function, can be linked through a predetermined bCp value along with the traditional ¯X ¡ R control charts to form goal control limits for directed continuous improvement efforts from the marketplace price. However, bCp is a point estimator of the Cp index and may vary from time to time subject to the sampling error [13]. To strengthen the use of target costing technique, the concept of applying a lower confidence limit of the bCp index could reduce the sampling error".	Wu, H.H. and F.J. Yu. 2007. "A practical implementation of target costing technique in improving product quality from cost consideration" Journal of Statistics and Management Systems 10(5): 743-755.
Point 22: "Target cost is determined before design, basing on customer’s information; no information from design should be used (Tanaka, 1993). On the other hand, the costs will be realized when the building will be built according to the chosen design solution. Construction industry lacks a design management concept that explains how these two orthogonal cost perspectives can be combined".	Pennanen, A., G. Ballard and Y. Haahtela. 2011. "Target costing and designing to targets in construction" Journal of Financial Management of Property and Construction 16(1), Emerald: 52-63.

With a set of main points collected, the writer produces a set of cognitive map variables. These variables are informed by the set of main points from Table 1. These variables are presented in Table 2.

Table 2: Cognitive map variables based on Table 1

Cognitive map variables	Literature review points
Variable 1: Drivers of interest in target costing	Point 6: "Early target costing researchers used survey methodology to examine the attributes of firms adopting target costing. In surveys of Japanese and Dutch firms, Tani et al. (1994) and Dekker and Smidt (2003), respectively, found that the primary reason cited for using target costing was cost reduction. Other reasons frequently cited included improving product quality, achieving timely introduction of new products, and improving communication (Tani et al., 1994; Ellram, 2000). Analysis of target costing firms revealed that they were often in highly competitive markets (Swenson et al., 2003) with high environmental uncertainty". Point 7: "The use of cost information and cost management during product design is a subject that receives increasing attention in the accounting literature (Anderson and Sedatole, 1998; Davila, 2000). The main motivation for managing costs during product design is that after the product development stage most costs have been ‘‘designed’’ into the product and during production cannot be influenced (significantly) anymore". Point 10: "Target costing is not a new idea, even though only a small number of North American companies fully embrace its elements. Henry Ford developed the first mass-produced automobile, the Model T, in 1908 with the objective of increasing volume by continually lowering its price, and by 1913 was able to sell it for under $500. Obviously, to do that and make money, costs would have to be tightly managed. Ford managed material costs via backward integration, labor costs by the use of the assembly line and efficiency improvements, and other costs by frugal behavior". Point 13: "Target costing originated in Japan in the 1960s, though it remained a secret for years. Since the 1980s, however, when target costing was widely recognized as a major factor for the superior competitive position of Japanese companies, extensive efforts have been made to convey target costing to Western companies". Point 22: "Target cost is determined before design, basing on customer’s information; no information from design should be used (Tanaka, 1993). On the other hand, the costs will be realized when the building will be built according to the chosen design solution. Construction industry lacks a design management concept that explains how these two orthogonal cost perspectives can be combined".
Variable 2: Improve intellectual understanding of target costing	Point 1: "target costing has replaced the question ‘What does a product cost?’ with the question ‘What may a product cost?’ in order to become an economic success in its future market (see Ewert and Wagenhofer, 1997: 306–17). The most obvious example is the subtraction method, an integral part of target costing’s ‘market into company’ approach. Using this method, a target profit is subtracted from the exogenously determined market price to arrive at a total unit cost allowed by the market for a particular product". Point 2: "... a second aspect of target costing involves its use as a tool to coordinate efforts within the firm to reach the allowable costs. This is accomplished by providing a cost target that must be met by the engineers, in order to make eventual production of the product feasible". Point 3: "... target costing is considered a strategic management accounting system. This implies that its main focus is on long-term cost management rather than the short-term focus adopted by more traditional cost accounting systems. This is a direct result from the finding that a major portion of a product’s cost is already determined when it is launched in its respective market (see Berliner and Brimson, 1988: 140). Target costing takes this into account by focusing on cost reductions at a stage with plenty of opportunities to influence a new product’s cost". Point 9: "Central to the target costing concept is ‘‘reverse costing’’, in which an estimation of the attainable selling price and the required profit margin are used to determine the allowable cost for a new product. In the accounting literature this reverse costing mechanism is referred to as ‘‘market driven costing’’ (Cooper and Slagmulder, 1997). This market orientation is an essential characteristic of target costing systems..". Point 11: "Robin Cooper (1992), for example, says, “The object of target costing is to identify the production cost of a proposed product so that, when sold, it generates the desired profit margin.”..". Point 12: "Since target costing is usually applied to new product planning, which frequently requires investments in tooling, equipment, and other assets influencing costs, it can legitimately be said that price drives both costs and investments". Point 14: "As Monden (1995), for example, states: “Target costing is defined as a companywide profit management activity during the new product development stage that includes: (1) planning products that have customer-pleasing quality, (2) determining target costs (including target investment costs) for the new product to yield the target profit required over the medium to long term given the current market conditions, and (3) devising ways to make the product design achieve target costs while also satisfying customer needs for quality and prompt delivery.”..". Point 18: "According to the Institution of Chemical Engineers (2007), a target cost contract is defined as “a particular type of cost reimbursement contract in which the contractor is reimbursed his or her costs subject to the application of a formula, which allows the contractor to share in savings made, often called ‘gain share,’ or to contribute towards additional costs incurred, called ‘pain share,’ according to how well the parties are able to manage the cost of the work.”..". Point 21: "Sauers [14] has discussed target costing technique from mathematical viewpoints: The specification limits, derived from the “nominal-is-best” Taguchi loss function, can be linked through a predetermined bCp value along with the traditional ¯X ¡ R control charts to form goal control limits for directed continuous improvement efforts from the marketplace price. However, bCp is a point estimator of the Cp index and may vary from time to time subject to the sampling error [13]. To strengthen the use of target costing technique, the concept of applying a lower confidence limit of the bCp index could reduce the sampling error".
Variable 3: Effective target costing practices	Point 4: "Target costing is a cost management system for developing products whose profitability is deemed sufficient to justify their production. The strategy underlying target costing is that 80–85% of a product’s life cycle cost is determined during its development stage. Consequently, target costing focuses its efforts on a product’s development since it has the greatest potential for managing a product’s cost". Point 5: "Target costing begins with research into the attributes and quality customers want in a prospective product and the price they are willing to pay for these features. The next step involves subtracting the profitability required by the firm to manufacture a product from its market price to determine its target, or allowable, cost. All subsequent efforts of target costing are focused on achieving a product’s allowable cost. If a product’s cost can be achieved, it is produced. Otherwise, the product is rejected as financially infeasible to manufacture". Point 8: "In relation to this TCM [target cost management] system specific tools were developed such as cost tables, value engineering, total quality management and inter-organizational cost management". Point 16: "the target costing process is being used for a new product or service. The target costing process begins with developing an understanding of unmet needs in the marketplace, and then determining what customers would pay to have their needs met, the ‘‘target price.’’ Internal goals and pressures determine the profit margin desired. Calculating the allowable target cost is the next step". Point 20: "Innovation on core technology is becoming very important in many industries. Logistic strategy including suppliers procurement strategy, and location strategy as well are becoming important in today's competitive environment. Within this framework, TCM [target cost management] has to be extended to include the whole business strategy. It can no longer be limited only to product strategies".
Variable 4: Learn from target costing practices	Point 15: "Even though the basic concept of target costing has been in existence in Japan for more than 40 years, its application has evolved rather slowly as many companies responded to changes in the external environment. As competition grew fiercer and profits weakened, the use of target costing intensified and companies developed better methodologies". Point 17: "While target costing is at least mentioned in most of the leading purchasing texts today (Burt and Pinkerton, 1996; Dobler and Burt, 1996; Leenders and Fearon, 1997; Van Weele, 2002), it is given very brief exposure - generally less than one page. It is no wonder, given the limited attention to target costing in the purchasing literature, that the purchasing/supply function is given very limited attention in the target costing literature". Point 19: "Until now, the focus on TCM [target cost management] was only made for a single product. This is mainly because attention was put on product manager for the development of a single model in the automobile industry".

The next step is to relate the cognitive map variables to make up a cognitive map on target costing. The cognitive map and its explanation are presented in the next section.

A cognitive map on target costing and its interpretation

By relating the four variables identified in Table 2, the writer comes up with a cognitive map on target costing, as shown in Figure 1.

These cognitive  map variables, four of them altogether, are related to constitute a systemic image of target costing. The links in the cognitive map (re: Figure 1) indicate direction of influences between variables. The + sign shows that an increase in one variable leads to an increase in another variable while a -ve sign tells us that in increase in one variable leads to a decrease in another variable.  If there no signs shown on the arrows, that means the influences can be positive or negative.  For further information on target costing, readers are referred to the Literature on target costing Facebook page.

Concluding remarks

The cognitive mapping exercise captures in one diagram some of the main variables involved in target costing. The resultant cognitive map promotes an exploratory way to study target costing in a holistic tone. The experience of the cognitive mapping exercise is that it can be a quick, efficient and entertaining way to explore a complex topic such as target costing in Management accounting. Finally, readers who are interested in cognitive mapping should also find the article informative on this mapping topic.

Bibliography

1.      Chan, D.W.M., P.T.I. Lam, J.H.L. Chan, T. Ma and T. Perkin. 2012. "A Comparative Study of the Benefits of Applying Target Cost Contracts Between South Australia and Hong Kong" Project Management Journal 43(2) April: 4-20.

2.      Dekker, H. and P. Smidt. 2003. "A survey of the adoption and use of target costing in Dutch firms" Int. J. Production Economics 84, Elsevier: 293-305.

3.      Eden, C. and P. Simpson. 1989. "SODA and cognitive mapping in practice", pp. 43-70, in Rosenhead, J. (editor) Rational Analysis for a Problematic World, Wiley, Chichester.

4.      Eden, C., C. Jones and D. Sims. 1983. Messing about in Problems: An informal structured approach to their identification and management, Pergamon Press, Oxford.

5.      Ellram, L.M. 2002. "Supply management's involvement in the target costing process" European Journal  of Purchasing & Supply Management 8, Pergamon: 235-244.

6.      Ewert, R. and C. Ernst. 1999. "Target costing, coordination and strategic cost management" European Accounting Review 8(1): 23-49.

7.      Feil, P., K.H. Yook and I.W. Kim. 2004. "Japanese Target Costing: A Historical Perspective" International Journal of Strategic Cost Management, Spring: 10-19.

8.      Institute of Management Accountants. 1994. "Implementing target costing" IMA Publication Number 98377, Institute of Management Accountants, 10 Paragon Drive Montvale, NJ 07645.

9.      Kee, R. 2010. "The sufficiency of target costing for evaluating production-related decisions" Int. J. Production Economics 126, Elsevier: 204-211.

10. Literature on cognitive mapping Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/Literature-on-cognitive-mapping-800894476751355/).

11. Literature on literature review Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/literature.literaturereview/).

12. Literature on target costing Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/Literature-on-target-costing-1606887996049639/).

13. Managerial intellectual learning Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/managerial.intellectual.learning/).

14. Okano, H. 1996. "Target Cost Management Strategy and organization in the automotive industry" Draft for 1996 IMVP Sponsors Meeting, Graduate School of Business Osaka City University, Sugimoto, Sumiyoshi, Osaka 558, Japan.

15. Open University. n.d. "Sign graph" Systems Thinking and Practice (T552): Diagramming, Open University, U.K. (url address: http://systems.open.ac.uk/materials/T552/) [visited at April 10, 2017].

16. Pennanen, A., G. Ballard and Y. Haahtela. 2011. "Target costing and designing to targets in construction" Journal of Financial Management of Property and Construction 16(1), Emerald: 52-63.

17. Wu, H.H. and F.J. Yu. 2007. "A practical implementation of target costing technique in improving product quality from cost consideration" Journal of Statistics and Management Systems 10(5): 743-755.