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Target Costing in Japan

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Target Costing in Japan

Japan is always a good place for useful insight on innovation management accounting practice and technique. From early on, the Japanese recognized that the most efficient way to keep costs down was to design them out of their products, not to reduce them after the products entered production. This realization reflects a fundamental reality of cost management in Japan; the majority of a products cost as much as 90 to 95% according to some experts are designed in. Consequently, effective cost control programs in a Japanese business typically focus heavily on the design process for a particular product. This is done primarily using the concept known as taget costing, as well as value engineering (VE). Target costing is used to determine what the market is willing to pay for a product. Using the target market price (i.e., the price required to win the customers business, the manager then subtracts the target profit to arrive at the target cost. After the target cost is determined, value engineering then is used to design the product in order to achieve the prespecified targeted level of costs. Thus, target costing manages costs by effectively designing into the products and processes the required costs in order to achieve the desired profit.

Need assistance in answering the following questions:

(1) What is the effect of target costing and value engineering on the use of variances? (2) Specifically, will material usage variance and labor efficiency variances be more or less important to a firm that strictly uses target costing and value engineering versus a traditional firm that is more focused on controlling daily production processes.

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(1) What is the effect of target costing and Value engineering on the use of variances?

The effect of target costing and value engineering usually has the effect of reducing variances in general and unfavorable variances in particular. The reasons for this is that hen when the target cost is determined, then careful value engineering is used to design the product so that the targeted level of costs is achieved. This entire process is such that it decreases variances. If there was negative variance in the process, then the target costs would not have been achieved. By the use of value engineering designs are created that reduce variances so that the target profit is achieved. Target costing is a cost management tool for reducing cost of a product through production, engineering, research and design. The target cost is the maximum amount that can be incurred. So if ...

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