Target Costing in Textiles

How Target Cost Fits into the Textiles

Target costing is not the exact same process for all companies that use it.typically target costing was used for new products,so that it was considered a tool for companies with frequent product changes. The key element in target costing is the market orientation of the entire costing and product development process.by introducing the market price as the focal point of the analysis,target costing avoids problems of other costing approaches:

• Costing becomes a managerial tool to achieve succesfull product design rather documenting historical data

• An economically relevant variable (price) becomes the driver of the product development process rather than its output.this results in a market and profit driven product development process rather.

• Due to its market orientation target costing can consider long-term corporate strategies in the market.variable costing and actively based costing tend to focus more on short term goals.

• Due to its specific purpose target costing tends to provide decision relevant data,while traditional absorption costing models tend to document all the cost,independent of the decision making relevance.

Key drivers for the use of target costing also seem to be intense competition and a price sensitive market.both those two drivers are frequently described for the textile companies.while the price sensitivity of the markets depends largely on the specific niche and customer base,competition appears to have become more intense throughout the textile fields.

Driving forces appear to be global competition,which increases as logistical costs are reduced.transportation has become more cost efficient and in many cases also more reliable.Communcation ,data exchange have become faster and better,global supply chains have become a standard in the industry,resulting in an increased number of suppliers in every regional market,thus effectively increasing competition.

At the same time the international or global orientation of the textile worlds creates some specific challenges and opportunities in this industry.Market prices are differentiated as multiple regional and functional markets are served.At the same time the number of sourcing options for components inside a company has increased as has the complexity of possible product cost factors.

Product life cycles not only in textiles and apparel have become shorter.While fashion cycles have clear advantages for the textile world,the product development process must be shortened to match this trend.
Here elements of target costing have long been part of the apparel product development process,probably long before target costing was widely discussed in the literature.

Important Tool for the Textile and Apparel Industries

Target costing is a promising and important tool for the textile and apparel industries .

Textiles and apparel are typically operating ina price sensitive market,so that pricing products is extremely important.target costing avoids the development of products with costs that do not match market requirements. Target costing can be used successfully in manufacturing scenarios and in assembly industries and is therefore an applicable tool for Textiles.

Basic Levels in Target Costing

Market Level

The First Phase of the target costing process leads to establishing the target price of the product.this is a key difference to traditional costing methods: Target costing is price-based and therefore rooted in the market.for new products the process of finding a market price begins with the definition of the market niche the company wants to address. The basic needs the product should address for the group of potential customers are defined as well.A detailed competitive analysis evaluates what kinds of products are presently available to potential clients through competitors,and what changes may be expected upon the introduction of a new product to this market.These two activities then lead to a specific definition of the market niche and the target group.Once the target group has identified and defined ,customer requirements for the product can be determined. understanding the relevance of various requirements is a key element in target costing and product development .

The final activity in the market level phase is establishing a target profit.the target profit for a specific product is based on long-term profit strategies for the company as well as short-term market share strategies for the product.

The actual target cost of the product is then simply based on the formula

Target cost= target price-target profit

Product Level

 

The second phase of the target costing process deals with designing the product so that it will meet the target cost.the first step in this phase is to determine the status quo and computing what cost of the new product would be,based on existing cost experiences from current products.these is usually plenty of data available apparel companies.this data is often generated by a traditional standard costing system,and additional work may have to be done in order to break down the cost by components. For completely new products this cost estimate is done by approximating the cost through comparision to existing or similar products.comparing this cost to the target cost provides the cost gap that tells the company how much the product cost has to be lowered. In the following step cost has to be designed out of the product.This means that when designing the product cost considerations drive the process.the choice odf design is influenced by its potential impact on all cost factors.It is important to note that all costs needs to be considered at this stage ,including supplies,manufacturing,marketing,distribution and cutomer service.The cost in all these areas is influenced by a products design,and it needs to be addressed before any resources in these areas are commited.
The critical differsnce between traditional product costing and pricing and target costing is the market orientation and the price-lead product design.Through out the process ,target cost remains overriding goal i.e under no circumstances may the target cost be exceeded.In traditional cost-lead pricing product design typically determines the price based on component and conversion costs.

Important techniques in designing cost out of the product include value engineering(VE), design for manufacture and assembly (DFMA) and quality function deployment(QFD) .value is defined as function/cost and as such reflects the producers perspective.percieved value is defined as perceived benefits/price and as such describes the customers perspective. VE is systematic evaluation of cost factors with the goal of Maximizing customer value.DFMA focuses on designing a product that is easy to assemble and manufacture. The QFD matrix links customer requirements and their relative importance with product functions or product components.

Component Level

 The Third Phase is the component level and in many cases this phase runs parallel with the product level target costing.depending on the product the individual components are broken down into sub-functions , and a similar process as in the second phase begins.typically the component level includes close involvement with suppliers,especially when complete subsystems are outsourced.aa aspects of supplier selection and supplier management are part of this phase. As the apparel industry sources globally from many different suppliers and regions,this is likely to become a more important function.the textile industry on the other hand is more process oriented and typically has a more limited number of outside suppliers.more of the cost reduction efforts are taking place within the company, eg, waste reduction,re-design of processes,and the product design aspects.

Target Costing

Target costing describes a process of first assessing a target price and then designing a product to meet the price.

Usually Target costing is a part of a total cost management system,leading away from traditional financial accounting to management accounting. Target costing is most beneficial to assembly-oriented industries rather than process-oriented manufacturers.it is also pointed out that target costing is more applicable for industries with frequent product changes and short product life cycles.These criteria fit many companies in the fashion driven apparel industry,where products have short seasons,and change drives the industry more than anything else.The process in the apparel industry are largely assembly oriented.

The process of target costing is supposed to be very interactive and ideally most of the process activities happen simultaneously or parallel.

Traditional Pricing and Costing

Traditional pricing development typically starts with a basic product design developed in the research and development branch of a firm.this may be a design group,a research lab,and engineering team,or any other group of people in the company that is responsible for developing new products.

After the basic product design has been developed the price is typically found by adding all costs and a desired profit margin.if this prics is acceptable in the market is only experienced when the product is actually introduced and offered to potential customers. There are several reasons why a new product is introduced to the market at the wrong price.A product may be over-designed, i.e it offers more elaborate features than the customers want or uses far higher quality raw materials than the needed for the desired performance level.target costing attempts to address this issue by moving cost early into the product development phase.

Costing Methods

Job Costing

This is done, as the name suggests, on job works which may differ from case to case basis. By giving different job numbers and debiting the costs on the jobs, cost of each job work can be ascertained.

Batch Costing

This is similar to job costing but pertains to batches.

Contract or Terminal Costing

This is done for large contracts. Such businesses need not maintain costs separately as financial accounting will indicate the costs and expenses. In such contracting firms, the cost sheets are maintained for individual contracts. In the absence of expense budgets, inefficiencies are often hidden in such cost sheets.

Single or Output Costing

This is done when the end product is single like a colliery or a power station. Cost sheets are maintained.

Process Costing

This is useful when a product passes through various processes, yielding different by products of commercial value. This is useful in industries like refineries.

Operation Costing

This is followed by mechanical engineering industries which make products or parts. Each manufacturing operation cost is taken into account. There is no difference between this and process costing.

Operating Costing

This method is followed when the company does not have a specific product as output like the service industries.

Departmental Costing

When an end product is ultimately manufactured by different departments this method can be useful.

Multiple Costing

This is useful when a product is manufactured in an assembly line like an automobile. It is important to choose the most appropriate method of costing for your business or industry. Most businesses do not like to engage cost accountants and leave it to financial accountants to take care of this job. It is not recommended. There are many free lance cost accountants available and they can be engaged on need basis.

Overview of Textile Costing

Since the industrial beginnings,textiles and apparel have been the leaders in terms of cost awareness as well as product innovations.

For the apparel industry,development of innovations and fashions has long been the driving factor of growth,and the textile industry has reinvented itself again through new products and new markets.