Simulating the Target Costing Process in a Product Design Environment

Abstract

Target costing emphasizes cost reduction at the product design stage of the product development cycle, before most product costs are committed or “locked in.” Even though the authors of numerous journal articles and textbooks promote target costing and its application to industry, few make the connection between target costing and goal setting theory. This active learning simulation demonstrates how a management theory (goal setting theory) is relevant to a business improvement initiative (target costing). As part of the target costing simulation, student participants work in teams to address a business issue that cuts across functional boundaries. In addition to the accounting function, a target costing initiative requires participation from sales, marketing, and design engineering. Therefore, students experience firsthand how diverse functional areas interact to solve a business problem. The simulation begins with the students learning how to build and develop an activity-based product cost for a model truck. The students are then divided into teams and instructed to reduce the truck’s cost through a re-design exercise, subject to certain customer requirements and quality constraints. Half of the student teams are assigned a specific cost reduction target, and the other half is instructed to reduce costs “as much as possible.” Students then strive to reduce the cost of the truck’s design by eliminating unnecessary parts, by using less expensive parts, and by using less part variety. As the student teams evaluate potential new designs, they actually use detailed activity cost information from the product costing system to guide their design decisions. We typically find that teams with a specific cost target reduce costs more than teams with “do your best” goals. We end by having a discussion about target costing, goal setting theory, and the implications of the target costing simulation.