Target Costing: The Nippon Parts Corporation Case

Abstract

This case describes an example of target costing practice. A Japanese company called Nippon Parts Corporation installed a unique cost management system during the 1960's to help achieve their management goals. The type of target cost system named KIHON-GENKA was utilized both in designing and pricing products and in controlling cost in production. By using KIHON-GENKA, management thought they could attain their goals. However, the business environment changed after the collapse of the Japanese bubble in 1991, and the management recognized the necessity to revise the cost system. This case examines several assumptions upon which the target costing practice relies. In the company's early years, the economic and business conditions fit the assumptions of target costing very closely. Thus target costing was an effective system for design and cost control. As the Japanese economy changed in the 1990s, however, the conditions diverged from the assumptions of target costing, and the company was obligated to modify its target costing system. While describing the changes in business environment of this company starting from the 1960's and into the 2000's, it also focuses on the relationship between the target costing practice and the business environment which allows a specific target costing to be an effective system. The case provides students with an opportunity to see target costing in practice, and to work with changes in the target costing system in response to changes in the business environment. The case has been class tested, and was well received by students.