Effects of the tightness of target profit & cost on target cost achievement: an empirical research

Target costing is widely known as the system to support the cost reduction process for reducing the price of the product at the new product development, which has been adopted not only in the automobile and other assembly manufacturing industries but also in the process-type industries. For its successful implementation, the target cost must be determined in a rational manner. If it is not determined rationally, the designing activities cannot be controlled, and targets will be ineffective and the discipline of the whole target costing system would be lost. An effective way to determine the target cost rationally is to link cost reduction activity to the behavioral base of target costing that deals with the behaviors needed to succeed at target costing. The motivational impacts of target-information type and target attainability on the cost-reduction performance of product designers have been studied here. This paper empirically examines how the tightness of target profit and target cost methods influences the target cost achievement. The goal-setting theory in psychology is used for hypotheses formulation. The findings and based on a mail-out survey of 146 machinery, electrical and electronics, transportation equipment, and precision machinery companies listed on the Tokyo Stock Exchange Part I. The effects of these variables on target cost achievement are evaluated through a variation of logistic regression of ordinal categorical variables called proportional-odds model. The findings of the study confirm our hypothesis that tighter the target profit and cost methods employed better the target cost achievement. The uses of \u27tight\u27 and \u27medium-tight\u27 method for calculating target cost, subtractive and combination, renders higher target cost achievement level in case of wider utilization of tight target profit (TP1H). Similarly, the higher use of \u27medium-tight\u27 target profit method (TP2H) along with \u27tight\u27 target cost method improves the target cost achievement. Irrespective of the target profit method employed, adding-up method, the loose method for determining target cost does not improve the target cost achievement level. There are hardly any previous studies in the target costing literature dealing with the research questions that are being investigated by this research. The research problems are of immense importance as these facilitate the determination of a discerning target cost on which the success of a target costing system depends