Target costing: The Effect of Information Timing on Cost Reduction

Abstract

Increased competition has increased companies' desire to lower costs while also increasing the need to shorten product design and redesign times by using a staggered redesign process (where not all relevant redesign information is available upfront). Target costing is generally perceived as more effective at lowering costs compared to general do your best cost reduction goals. However, using goal-setting theory, we suggest that this result will not hold in a staggered information condition. Using a Lego truck redesign experiment, we find that specific cost targets (or goals) result in lower costs compared to general goals when all relevant design information is available upfront. However, staggered information reduces performance for groups with specific goals and improves performance for groups with general goals. As a result, there is no significant performance difference between specific and general goals when information is staggered. To the extent that companies are increasingly emphasizing faster design times and relevant design information is staggered, the results of this study offer an explanation of why such firms may not embrace target costing.