Article review of “Economic value added in target costing”: for advancement management accounting study

Article review of “Economic value added in target costing”

 

How to present this article in Harvard reference format

Woods, M., Taylor, L. & Cheng Ge Fang, G., 2012. Electronics: A case study of economic value added in target costing. Management Accounting Research, 23(4), pp.261–277. https://doi.org/10.1016/j.mar.2012.09.002.

 

What are the key research issues the article wants to address?

 

The key research issues addressed by the article are:

1.       The integration of Economic Value Added (EVA) into a target costing system within a large multinational corporation (MNC), specifically how EVA can be cascaded down from corporate level to product level — a topic with limited empirical research at the firm level.

2.       The feasibility and challenges of using EVA, a shareholder-focused performance metric, at the product level within strategic management accounting (SMA), and its compatibility with customer-facing systems of performance management.

3.       The gap in empirical studies on target costing practices, especially regarding the determination of target rates of return (such as whether EVA or Return on Assets (ROA) might be superior to traditional return on sales metrics) and how EVA can serve as a more relevant measure in target costing.

4.       Understanding how target costing combined with EVA and other SMA techniques can align strategy formulation with strategy execution and profit generation effectively.

These issues respond to calls in the literature for more empirical research in SMA and EVA, particularly how EVA works within organizational control systems at the product level and its impact on performance management practices.

 

Describe two main theories employed in this article.

The two main theories employed in the article are:

1.       Economic Value Added (EVA) and Residual Income Theory: The article builds on the theoretical foundation that EVA, a value-based performance metric, can be extended from the corporate level down to product level to measure economic profit more accurately than traditional accounting measures such as return on sales. EVA is based on residual income concepts, where economic profit is defined as net operating profit after tax (NOPAT) minus a charge for the cost of capital employed. The theory supports that a product's EVA can be linked to its net present value (NPV), making product-level EVA a theoretically sound metric for performance measurement and target costing. However, the article also acknowledges the practical difficulties of applying EVA at the product level, given the complexity of allocating joint costs, capital, and shared assets, which is highlighted by prior works such as Zimmerman (1997) and Francis and Minchington (2002).

2.       Strategic Management Accounting (SMA) and Target Costing Theory: Target costing is conceptualized within the framework of SMA, emphasizing its market orientation, focusing on meeting both shareholder and customer interests by starting with the expected sales price and working backward to set cost targets. The theory sees target costing as a tool for profit planning and cost management that aligns product design and cost reduction initiatives with strategic objectives. The article explores how target costing integrates performance management systems, including EVA and the balanced scorecard, positioning target costing as a bridge between customer value and shareholder value. This theoretical perspective draws on previous research that defines target costing as a collaborative, cross-functional process incorporating life cycle costing, Kaizen costing, and activity-based costing (ABC).

Together, these theories frame the analysis of how EVA can be incorporated into target costing processes to align financial and strategic performance at the product level within a multinational enterprise.

 

Describe 3 main claims of the article in terms of Toulmin's model of argument.

Applying Toulmin's model of argument, the article presents the following three main claims:

1.       Claim 1: Target costing can be used to align customer and shareholder interests by integrating EVA as a performance measure at the product level.

·          Grounds (Evidence): The case study of a European multinational shows that incorporating EVA targets into target costing directs management attention to capital costs and working capital control at the product level, encouraging cost reduction strategies that reflect both customer value and shareholder value.

·          Warrant (Assumption): Using financial performance measures that include the cost of capital (like EVA) in target costing provides a more complete picture of product profitability, facilitating alignment between customer-facing and shareholder-focused objectives.

·          Backing: Prior theoretical work on residual income and EVA supports the idea that value-based measures link economic profit to performance, and Ansari et al. (2007) describe target costing as a bridge connecting strategy formulation with execution.

·          Qualifier: Although alignment is possible, there remain practical challenges in accurately measuring EVA at product level due to complexity in cost allocations.

2.       Claim 2: Despite its theoretical appeal, implementing EVA at the product level is highly problematic in practice due to accounting complexities and cost allocation issues.

·          Grounds: The case evidence and literature review (Zimmerman, 1997; Francis and Minchington, 2002) highlight difficulties dealing with shared costs, joint costs, synergies, and capital charges over multiple periods in a product's lifecycle.

·          Warrant: The practical complexities of allocating capital and shared assets undermine the feasibility and accuracy of product-level EVA measurements.

·          Backing: Existing criticisms of EVA in divisional performance measurement are extended to the more granular product level in this paper.

·          Qualifier: While EVA implementation is challenging, alternatives such as residual income may offer more practical approaches.

3.       Claim 3: Target costing provides an effective framework for continuous product development and cost management that incorporates value-based metrics and reflects shifting management accounting practices in multinational contexts.

·          Grounds: Evidence from Electronics’ Test product group illustrates the use of life cycle financial product plans with multi-period EVA modeling, supported by close supplier relationships (extended enterprise) and ongoing cost reductions throughout product life cycles.

·          Warrant: Incorporating market orientation and strategic accounting techniques facilitates the management of long product development cycles and competitive market positioning .

·          Backing: The literature on target costing, Kaizen costing, and Japanese management accounting practices reinforces this life cycle and continuous improvement focus.

·          Qualifier: This approach requires careful balancing of cultural and institutional influences, especially when integrating Anglo-American shareholder value concepts into traditional German cooperative market economy settings.

These claims collectively support the article’s argument that integrating EVA into target costing is valuable but challenging, and that target costing—when combined with strategic management accounting—serves as an important link between strategy and operational cost management.

** reference:  a collection of management accounting notes