Integration of Specification-Based Costing and Target Costing for Competitive Advantage

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Integration of Specification-Based Costing and Target Costing for
Competitive Advantage

Riyam Mohammad Abbas

Najaf technical institute, Al-Furat Al-Awsat Technical University

A R T I C L E I N f

О

Article history:

Submission Date: 23 February 2025

Accepted Date: 19 March 2025

Published Date: 22 April 2025

VOLUME:

Vol.05 Issue04

Page No. 07-27

D

OI: -

https://doi.org/10.37547/marketing-
fmmej-05-04-02

A B S T R A C T

The current research aims to address the problem faced by the study
sample company, which is characterized by inefficiency and inaccuracy in
cost management to support competitive advantages due to its adherence
to traditional systems. This is achieved by adopting modern cost and
administrative accounting methods and techniques consistent with the
rapid changes in the Iraqi economic environment. This approach aims to
manage costs and support competitive advantages by using the cost-based
specification (ABCII) and target costing (TC) techniques in a
complementary relationship, ensuring improved competitiveness and
financial position for the economic unit in the study sample. This, in turn,
positively impacts economic development in Iraq. The current study, titled
"Integration of the Cost-Based-Specification and Target Costing
Techniques for Cost Management and Supporting Competitive
Advantages," derives its importance from the fact that ABCCI and TC
techniques provide appropriate information that contributes to more
accurate management of product costs and provides the necessary support
for producing and delivering the final product with the specifications and
features desired by the customer at the lowest possible cost. The
importance of the current study also lies in demonstrating the cognitive
centers of the variables that contribute to the product's competitiveness in
the market.

Keywords:

Costing Technique, Production Specifications, Target Costing,

Competitive Advantage.

INTRODUCTION

Target costing is a tool of cost management, which is
based on market and customer analysis from cost
perspective, on product development stage with
respect to product. This method ensures that product
is designed by considering cost targets and costs are

determined so as to ensure that the product has a
competitive advantage to enable to sell it (Yuksel
Pazarceviren & Celayir, 2014). For the firms that
implement target costing, product and process
developments are on the base of simultaneous

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ISSN: 2752-700X

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engineering and the concepts of Specification-Based
Costing (SBC) and Value Engineering (VE) are
activated. The purpose of such method is to reduce
the gap between the target costs and the actual costs
to be spent to manufacture a product. Production
performances of nations are determined together
with the cost considerations and it is aimed to
overcome year by year this difference. However, it is
also put forward fact that the methodology to be used
in this respect is as much important as the will for the
implementation. To make cost planning in product
development stage, compatibility should be provided
among the cost considerations and the cost engineers
who are responsible cost planning (Yuksel
Pazarceviren & Dede, 2015). Again in recent years,
the target costing method are attempted to be
brought in to vogue in the firms in which the high and
medium-low technology products are produced.
Needed transformation is tried to be realized in the
model and hence, such transformation is aimed to be
made in the product and the investment cost
together. The adaptation of the firms to new global
building is given prominence and it is given
information with respect to the target price and unit
cost.

Research Problem

The research problem revolves around the following
intellectual questions:

First:

Is it possible to integrate the techniques of

specification-based and target costing theoretically
(procedures) and practically (mechanisms and
working methods) within the company under study?

Second:

Does the integration of specification-based

costing and target costing contribute to the optimal
identification and allocation of costs (direct and
indirect) and provide appropriate information that
helps management perform its duties more
efficiently and effectively?

Third:

What is the role of integrating specification-

based and target costing in managing costs and
supporting competitive advantages?
Importance of the Research

A.

The study topic's scientific importance is highlighted
by its contribution to studying the most important
contemporary issues in cost management and
supporting competitive advantages to ensure the
continuity and sustainability of economic units'
activities by presenting the theoretical and scientific
aspects of administrative and costing methods and
techniques (ABCII, TC).

B.

B-The study attempts to contribute to identifying
scientific procedures for integrating administrative
and cost methods and techniques, which can help find
solutions to some administrative, cost, and financial
problems.

Research Objectives

The study aims to demonstrate the possibility of
achieving integration between ABCII and TC
technologies in a manner that contributes to
providing

appropriate

and

more

accurate

information to management about product costs,
helping them manage costs and support competitive
advantages more efficiently and effectively by
achieving the following objectives:

A.

Study and explain the cognitive foundations of ABCII
technology

within

an integrated conceptual

framework. B- Study and explain the cognitive
foundations of TC technology within an integrated
conceptual framework.

B.

Study and explain the cognitive foundations of cost
management and competitive advantage within a
conceptual framework.

C.

A theoretical inductive analysis of the role of
integration between ABCII and TC technologies in
managing costs and supporting competitive
advantages.

c.

Verify the practical impact of integrating ABCII and
TC technologies on cost management and supporting
competitive advantages for the study sample
company.

Research Hypothesis

The study is based on the following hypothesis:
(The integration of ABCII and TC technologies
contributes to cost management and supports the
competitive advantages of the study sample company
more efficiently and effectively than traditional
systems.)

DATA COLLECTION METHODS

This study followed a descriptive approach by
reviewing the literature, including studies, research,
theses, and university dissertations related to the
research topic.

Literature Review

During the past decades, a number of studies have

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attempted to investigate the use and diffusion of new
costing techniques, focusing on the search for a

relation between firms’ characteristics or contextual

factors that may influence theoretical reasoning on
the design of costing system and the actual use of
specific costing techniques (Cinquini et al., 2008).
Possibly,

these

studies

have

assessed

the

implementation of target costing in relation to other
management tools and techniques. Many of these
studies seem to suggest that firms should consider a
variety of theoretical issues in the choice of product
costing systems. For example, some studies provided
support to the idea that potential contextual factors

–

such as product variety, size or business complexity

–

influence the characteristics and the level of
sophistication of product costing system. Possibly,
other researches have focused on a different theme,
deal with managers attitude towards management
innovation and with the model of change itself. There
is an increased interest, though, in the search for a
relationship between the adoption of advanced cost

accounting techniques and firm’s performance. Such

studies seem to suggest to managers that the choice
to move towards a new costing paradigm is driven by
a sort of learning curve, should be monitored by
benchmarking with other companies, should be
addressed to acquire all the skills needed and

–

above

all

–

should be hidden by all the possible means of

acquiring competitive advantages on the market.
Possibly,

these

studies

have

assessed

the

performance of firms according to accounting figures.

Overview of Costing Methods

Product development and production processes are
going through an economical regime where global
competition increases day by day. In this context,
manufacturers need to decrease time and cost values
beginning from design step in their businesses. The
most remarkable approach in performing these is to
use up to date techniques more effectively. Nowdays,
therefore, manufacturers are keeping apace of these
techniques and they intend to make collaborations
with the different businesses in their sector too, by
their being aware of being stronger and with the

thought of “being with a stronger one strengthens
me”. Strategic approach combining specification

-

based costing method braced with market and
innovative data, and target costing techniques will
being decisive for competitive advantages of
businesses. This article presents an overview of the
proposed integration scheme together with its
constituent steps, emphasizing the contribution of
target costing in preserving the competitive edge.

Given the difficulties encountered in isolating
strategy from day-to-day tactical decisions and the
emphasis in the literature on the a posteriori
measurement of target costing effects, a framework is
advanced which views the entire process as a
strategic platform and identifies several pivotal
points at which costing considerations do have the
potential to shape overall corporate strategies
(Yuksel Pazarceviren & Celayir, 2014). Other parts of
this study are constructed in the following manner.
Target Costing is introduced in the next section,
together with a rationale for the strategy involved in
its deployment, and a thorough discussion of
prevalent definitions and concepts. The third section
looks at the widespread and diversified activities
under the heading of strategy, reviews a structuring
of the strategy into a relevant hierarchy and places
costing issues into this framework. Section four is
dedicated to specific cost management tools that
have emerged as a response to the new competitive
pressures of the 80s. The focus here is on newly-
developed principles and techniques of cost
management as they relate to target costing.

Specification-Based Costing Defined

Specification-Based Costing (SBC) is a simple and
accurate method that needs adherence to product
specification description and relative experience.
With reference to the final product inspection, the
article costs different information what could be
useful on costing and setting normally to optimize on
the cost with target cost approach. Target Costing
(TC) conceptual basis is explained. Relationship
between the cost estimates of inspection results and
between lot costing is discussed. Sector 1 defines final
product

inspection

plan,

describes

product

inspection tasks and develops their cost functions.
Sector 2 explains final product lot operation planning
and develops a practical example. An algorithm for
performing the lot operation planning and
optimization steps is provided. It is shown that TC can
be implemented with SBC reference currently
available and relatively cheap company cost and
financial control tools (Yuksel Pazarceviren & Celayir,
2014). Moreover, TC can be applied on market
control and profitability perception with lot
operation costing. Competitive advantage according
to low production and setup cost can be obtained
with this method. In recent years, the foundations of
Specification-Based Costing (SBC) methods are
founded. Generally, SBC is implemented in
combination with the commercial feasibility analysis
of a company. The product design and cost are the

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prime factors affecting feasibility conditions of a
commercial project. A great deal of research has
focused on the establishment of a target cost,
depending on the marketing equilibrium.
Life Cycle Profit Analysis is presented. A variation of
TCLCCA is explained where performance-based
promotion

policy

and

process

runtime

characteristics are considered. A model of Tactical
Design is introduced that represents application-
specific static characteristics as a simplified function
of regular evaluation runs. A Solution Quality
Prediction model that estimates the expected
performance of a new design is explained. System-
level simulation results are presented that compare
the performance of Interactive Genetic Algorithm
Optimization,

Model-based

Optimization

and

Reference Design Chaining. The MBO strategy is
shown to increase the efficiency of the evaluation
compared to the other methods when faced with the
constraints that define a practical scenario.
Moreover, its ability to find improved solutions with
less computational cost is verified (Yuksel
Pazarceviren & Dede, 2015). Finally, the episode's
results are presented that compare the Industrial
Period Efficiency and the Average Structural
Efficiency decrease of various optimization strategies
for ISCAS circuit design.

Target Costing Explained

Target cost is the maximum amount that a firm can
spend on a particular promotion, advertising
campaign, or other type of marketing process to
ensure a certain level of return. Accounting for a
portion of the target market, it is the anticipated
maximum unit cost to produce a particular product,
service, or component, along with a desired profit
margin. Target Costing is a cost management
approach that proactively determines the cost of a
particular product or service by looking into its
customer required functions and quality. The
objective of Target Costing is to provide the product
with the full range of customer requirements, and all
stages from design to production are carried out in a
manner that meets this requirement at the lowest
possible cost. Target Costing has shown a very
successful performance in the companies in which it
is implemented. When the factors that ensure the
success of Target Costing are investigated, it is seen
that they are based on the process through the
market, the development process of product, and the
methods used for cost management.
There are four fundamental components of Target

Costing. The first point of all is the Market price
estimation. In the decision of a new product, the
Manufacturer needs to take a clear scope of what
price range will ensure the sales of the new product.
Second part of the process in Target Costing is the
Target costing research, where the product is broken

down into products’ main subassemblies and parts,

and carefully investigates that will they fit into the
cost margins of achieving overall target cost. The
third element of Target Costing is its deployment. It is
the actual process of integrating Target Costing with
development process occurring in a combination of
design and production environment. Last basic
component of Target Costing is its utilization in
practice through the production phase of a product
life cycle. At this stage a part of the Target Costing still
remains in the commercial pricing and other market
related matters. However, as with any new project
development viewed through the Target Costing
perspective, the skills and knowledge accumulated
from prior projects feed into the newer products with
the aim of higher efficiency in the realization of the
project and overall Target Costing objectives.

Theoretical Framework

In competitive market environments, firms aim to
design products at lower costs in order to sell them
cheaper than competitors (Yuksel Pazarceviren &
Celayir, 2014). For this goal to be achieved, firms
must use methodologies that will allow them to incur
costs at designated levels. Target costing is one of
these methodologies. Target costing is a management
process consisting of rearrangement of the
production process according to the cost target and
pricing of the final product accordingly. For an
effective target costing implementation, firms use a
high number of cost management processes like price
analysis, value analysis, value engineering, and
activity-based costing. Operations and value
engineering deals mostly with the design. However,

the design is completed, and firms don’t have any

options to reduce the cost simply by redesigning the
project from scratch. So, the importance of the other
methods is increasing, so they have to find new ways.
Therefore, target costing can be used. At the initial
stage, the cost of the design was developed using
specification-based cost estimation systems and
having produced such parts in the past. As the project
developed, many redesigns were necessary to meet
the target cost. However, the use of specification-
based costing as a method to support the redesign
effort faced a fundamental weakness. Since these

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systems are based merely on the weight of the
product, costing results are similar for similar and
dissimilar parts which eliminate the opportunity to
reduce cost through material substitution. These
parts are costly because of many features that boost
production cost but not captured by the cost
estimation software (Nobumasa, 2018). These
features include deep draw sections, expensive
materials, or complex blank progressions.

The ‘‘how’’ knowledge of the process plan forms one

of the main sources of uncertainty in cost estimation
errors. And it also results in features in parts, like
many bend operations, or cutting operations with
special-shaped forms, elasto-plastic deformation,
etc., that only an experienced cost estimator or
producer could identify. Since they are based on the
experience of the personnel, they were not covered in
the cost estimation systems. It was observed that,
through elimination of these features, production
cost can be decreased while maintaining the
functionality of the part. With the increase in
globalization, cost management is becoming vital for
firms to survive leaders. Methods that would allow
the corporation of costs at predetermined levels are
of great importance. One widely suggested method is
the target costing method. However, there is still
space for development and integration in the
application of target costing within a company,
particularly within engineering departments. Making
an industry-based study, the technique has been
developed which integrates the strengths of
specification-based costing methodology and target
costing. The redesign and target costing departments
need to work compatibly. This compatibility is
facilitated by the establishment of a database of the
cost features that have proven beneficial or
detrimental to cost. In addition, design teams must
also be aware of these features influencing the cost.

Costing Theories and Models

The key perspectives and ideas of costing theories,
models, and methods are identified and selected as
independent variables. Vignettes are the method of
justification, and the vignettes are used as a base for
empirical testing. Costing model descriptions and
their vignettes are illustrated, and their compositions
are explained. Some discussions are given on the past,
ongoing studies and results.
For an economy, and particularly for industries, a
consumer-driven policy means to concentrate
resources on parts of the worth added chain where
one is able to establish and maintain a competitive

benefit. Industries worldwide are facing stimulation
from increasing international competition and the
necessity to keep pace with the metamorphosis of
market needs and wants. To combat the situation
industry has to maximize involvement and
proficiency in the operation of separate phases of the
value-added chain. Nevertheless, this might only be
achieved if most processes would be efficiently
structured. With the deregulation in Europe and
further worldwide sectors face a hypercompetitive
environment. The telecommunications market is now
totally deregulated and competition has passed from
the national level to a broader market with new
entrants. Traditional accounting systems are no
longer able to mature and furnish managers with
desirable

info

thus

issuing

new

methods,

simultaneously with Costing Theories, are needed.
Quite difficult conditions can be recognised with
extensive changes due to the year 2000 effect related
to the telecommunications sector. Japan has reported
a faster decline of the ISDN connection and its market
than was foreseen. The expansion of broadband
communication, an intermediate technology between
the highly advanced and very expensive current
technology and the slower future technologies is now
also in focus. (Nobumasa, 2018) In this evolutionary
view, it is vital to the long-term development of
society that preconditions for structural changes,
innovation and wealth increase are fostered. On the
basis.

Competitive Advantage Theories

Competitive advantage is often the biggest goal for
the companies that are in fierce competition
environment. So that, many companies are doing
various strategic planning to develop and sustain
competitive advantage. According to the strategic
management theory, two groups of factors were
created to explain why some companies earn higher
average profit rates in their industries. The two
groups as the environment-based theories and
company-based theories. Also, the conceptual basis
for these theories was established by economic
progress. Competitive advantage theories have two
roots in economics. The first, industry organization
theory explains that advantages arise from the
developing and strategically positioning the company
in the industrial structure. Advantages come from the
direct results of the market structure in which the
company operates. The industrial structure provides
the rules of the game, so the direct effects of
competition on all companies in the environment
affect the profitability of companies. The second

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group of theories describes the internal features of
the company affects profitability of the company. The
internal features of the company include resources,
basic competencies, capabilities, and strategic
advantages. These perceptions of new industrial
economics,

resource-based

view,

company

competency view and outsourcing views have been
adapted as a conceptual basis to identify the way the
companies in the fierce competitive environment.
There is no consensus in these schools of thought
concerning competitive advantage arising from
within the company, but there is sufficient overlap to
attempt a consensus approach. There are more than
fifty-seven competitive advantage theories, and for
the purposes of analysis, a common framework of
twenty similarities has been developed from these
theories. This framework seeks to consolidate the
broad spectrum of current theory into a more
consistent and workable set of constructs (Yuksel
Pazarceviren & Dede, 2015). This framework is
applied to analyze the extent this is consistent with
the emerging case study findings.

METHODOLOGY

Globalization and the rapid increase in competition
have made companies focus more on design
departments, which are the first step of production.
Because design decisions affect 70 percent of total
product costs. It is important to know the costs in this
context. For an effective costing system, enough
detailed information should be obtained from
production processes and alternative costs. Further
cost information is needed at the production design
stage, before implementation. Normally, a costing
analysis is only possible for mass production, after
the completion of tooling and instrumentation. But
with Activity-Based Costing, it is possible to do an
effective costing analysis before production starts
(Yuksel Pazarceviren & Celayir, 2014). The
traditional approach has always been to determine
the cost of the product after it has been

manufactured. In today’s challenging business

culture, it needs ensuring quality at the designed level
of costs. Economic and technical estimates in
feasibility studies for the manufacturing of a new
product must be thoroughly analyzed long before
production. As a result of these analyses, costs must
be calculated before starting production. It is
important to develop a plan for managing pre-
production efforts within the scope of this aim. Such
a plan has to be integrated with the Strategic
Management Process. Focusing on costly elements is

an important subject that must be considered in the
development of a product design. Indeed, the direct
manufacturing cost of a product is shaped mostly at
the stage of product design. Approximately 70-80%
of all costs are determined in relation to the product
in the product development process. Today, in the
intense and constantly effect carbon markets, it is not
possible to design a product without taking cost
considerations into account from the very beginning
(Maher AL-Khasawneh et al., 2019).

Research Design

The purpose of this research consists of clarifying
how and why the developmental mechanism of cost
control called Specification-Based Costing worked,
and how it connected to the costing target intended
by Target Costing. The importance of cost
management at the Development and Design stages
of new products has been understood for some time.
In the 1980s, companies in the U.S. and Europe
introduced methodologies with a view to cost
effectiveness at these stages such as Design-to-Cost
and Target Costing, doing so a step ahead of the
Japanese companies. The rise in the U.S. of Japanese
competition, together with globalization, has also
heightened the interest in cost management at these
stages on the part of management accounting and
other disciplines. Despite this, promotion of both
academic research and field research in this area is
much more advanced in Engineering than in
Management Accounting or its counterpart in Japan.
Meanwhile, study on the costing methodologies has
been conducted to pursue effectiveness, focusing
mainly on cost structure, target derivation and cost
estimation techniques. Though it is said that the
knowledge creation activities in each of the
participants are the essence of the target costing
activities, this point is approached from unique the
Knowledge Chain Model method. It is shown that in
fact the knowledge creation activities concerning
costing have latent possibilities of development in
new creative knowledge and important implications
are derived from examples of field study (Nobumasa,
2018). Of the Toyota group parts suppliers, this
research was carried out in two suppliers with
different policies, with neither of which Toyota
seemed totally satisfied. At a die-cast parts supplier,
this research was conducted during the cutting
process mold design stage of a newly developed
product; the quotation was three times over target;
the end result was that, as cost analysis raw cost data
were acquired, costing improvement proposals were

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put forward and costs were successfully reduced. At
the same time, it was shown that on the Toyota side
there was a fivefold principle concerning what should
not be explained to the supplier. At a plastic parts
supplier, with a one-year protracted dispute over
difference between the initial cost condition
explanation data and the challenge estimate, it was
found that with it being acknowledged that the
challenge estimate was based on real data, the cause
of the difference was ascribed to previously
unexplained assumptions on the services the molding
machine manufacturer would render the supplier.
Despite what some refer to in the case study design

field research as the “contamination” of the
researcher’s participation

effect, the above would

seem to argue that there is a need to reexamine from
the outset the scheme of conventional theoretical
research on Target Costing and to construct new
theories (Maher AL-Khasawneh et al., 2019).

Data Collection Techniques

In order to improve the ability to identify
specification-based costing with target costing and its
implementation. Data were collected with the help of
flexibly designed questionnaires that include open-
ended questions, dichotomous format questions,
rank order and 5-point Likert scale format questions
(hakim Mustafa Joudeh et al., 2016). These questions
were answered by people who have the most
accurate and up-to-date information about the
projects.
In addition, semi-structured in-depth interviews
were conducted with the architects most experienced
in specifying target costs. Considering the scope of
data collection and the overall research project
timeline, it was decided to conduct a detailed
qualitative content analysis of five interviews.
Interviews were structured around the topics of
project characteristics, target cost calculations,
project performances, benchmarking, and incentives.
Finally, both data collection techniques were
supplemented with the collection of secondary data
including annual and project-specific reports. These
materials

contains

aggregated

and

detailed

information on target costs, other accumulated costs,
and other performance measures in each project.

Analysis Methods

Model-based costing is an advanced method that
enables product cost calculation before the product is
manufactured. In the simplest terms, it is a technique

that aims to make a profit by determining target
prices in the production and pricing of products that
have a competitive advantage. In other words,
product targets that will provide competitive
advantage in the market are determined by target
costing and producing products in this direction is
called product design. The calculation of the target
cost of a product or service consists of providing all
the definitions, quantity of material, process, work
schedule, and cost lists and recording these data in
the accounting program or other software and
running the necessary reports. Costing operations
are carried out by the accounting department in
certain periods, or by those who are experts in the
field since they are an important part of the
production process, the benefits to be provided are
high, the wrong calculations can be disastrous
(Yuksel Pazarceviren & Celayir, 2014).
The activities to be carried out within the facility
should be given great importance for the target cost
calculation. The obtained; Calculation of the target
cost information matrix by identifying the costs of all
activities, Calculation of cost drivers and midterm
drivers according to the cost drivers as a factor
affecting the cost compared to the indirect costs,
Indirect costs are disbursed according to the
consumption rates of the cost drivers. Despite its
implementation in small businesses, it is most
common in the manufacturing sector, in large-scale
businesses, and in sectors that need to maintain a
competitive advantage in the market such as the
automotive and white goods sector. On the other
hand, today, it is seen that the use of target costing is
increasing in sectors such as construction and
services. With it, success is not temporary or short
term, so the basis for success must be strong.
Successful enterprises were based on a strong
foundation thanks to their cost-effective product
design infrastructure that they applied beyond the
basic; Additional measures were taken to ensure
product robustness.

Specification-Based Costing

Price suffered by the enterprise from the competitor
in the scope of product sales has different severity.
When this price decreases, the manufacturer makes a
loss for that product or production began with that
price. Especially, the costs of the companies that
started production with low price, inclusive of raw,
material, intermediary materials, energy, labor, and
outsourcing, increase for the next rounds. However,
if this reduced price is still continued during the

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production phase, it means that the companies have
suffered competition due to low price. In this
situation either the companies try to produce with
reduced costs, or an opportunity is sought to stop or
decrease the said production. Companies obtaining
full benefit of production from the manufactured
products would try to realize the both. The
opportunity for competitive enterprise is seen to
decrease its production costs (Yuksel Pazarceviren &
Celayir, 2014). At this stage, enterprise applies every
kind of instruments in order to decrease its product
costs to the possible extent and benefit of the present
know-how and information for this purpose.
Product costs must be decreased and also there must
be a difference with competitive enterprise. At this
point, a new concept that must be considered during
the design period of the product emerged under the
name of a specification-based costing in the product
cost analysis. The concept of specification-based
costing has emerged from the approach of the
activity-based costing method that emerged in the
1980s and has evolved into a model proposal based
on an existing target costing method. This study aims
to enable the manufacturer to model the target
costing from the price to be determined by the
competitor with the target costing-based activity-
based costing model based on costing tables (Yuksel
Pazarceviren & Dede, 2015). The literature review
section of the study is followed by the description of
the target costing, activity-based costing, activity-
based budgeting method, target costing-based
activity-based costing model and hypothesis of the
study. Setup and calculated data of the model with
costing tables are considered in the methodology
section.

The

conclusion

provides

important

implications of this research.

Principles of Specification-Based Costing

This study discusses target costing techniques which
will remove the traditional applications today and
aims to analyze them. ABC will be proposed to use in
target costing models. Target Costing based on ABC
will provide a competitive advantage to the business.
As a result, businesses will maximize customer,
market and profit share through effective cost
management.
Non-profitability of businesses and economic
fluctuations trigger

fluctuations

in

markets.

Therefore, businesses must provide financially solid
structures to protect their place in the industry.
Because the majority of businesses that lose money
go bankrupt or are forced to sell. Therefore,

businesses have turned to cost reduction. In
competitive conditions today, reducing costs some
more have become indispensable. Designing
products with functions that users demand in various
economical cost, providing required customer
satisfaction and keeping expenses less than the
desired financial level are the producer's basic
challenges. In other respects; The demand of
customers for high quality products, the limitation of
prices that customers will pay for this in the
framework of market conditions, the rapid and
responsible production and the significant changes in
the performance criteria required by the competitive
conditions had an increasing effect on the businesses.
In the current conditions of the internal and external
environment of the factors that qualify inertia as a
result of quickly shaped an intense rivalry, led
companies to question their nature of operation.
Recent changes due to global competition of
businesses and technological advancements lead to
innovations in the use of financial and non-financial
informations (Yuksel Pazarceviren & Dede, 2015).
Where the business is going, what they should do and
where they should invest this thing are some of the
vital questions that should be answered. As a result, a
strategy must be developed. The most important part
of the strategy to be developed has to set target cost
(Yuksel Pazarceviren & Celayir, 2014). Setting target
cost elements, the development of activity-based
costing and determine which costs should be
adopted, profit expectations, price determination
policies, sales forecasts, competitor performance
status, and development of the productivity analysis.
Appropriate strategies for the defined elements are
part of the target costing system.

Benefits and Challenges

Target costing provides guidance on how to control
and reduce costs in a corporate environment. There
are mainly two common approaches under the
concept of target costing; specification-based costing
and cost-plus pricing. Specification-based costing
models aim at achieving a competitive advantage in
trading industry by enhancing profitability and front
line professionals can price their products more
effectively (Yuksel Pazarceviren & Celayir, 2014). A
mediation role of a target costing approach is tested
and it is currently used in sense of the efforts devoted
to create overall cost estimates at the planning and
early processes of companies in the relevant industry.
Additionally, a target costing approach is suggested
to improve competitive advantage for project

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management companies in construction industry by
achieving a smarter market-based fee rate through
four values of target costing.
The tough competition in the domestic market
requires ever more competitiveness in terms of
reducing the costs of production. By managing the
quality cost more effectively and rationally, therefore,
business entities can achieve improvement in their
businesses and sustain their profitability. To reach
this end, the study pursues the efforts to streamline
integration of the two cost management systems;
specification-based costing (SBC) as an independent
variable and target costing (TC) as a mediating
variable, with regard to competitive advantage
consisting of cost leadership and strategic advantage.

Case Studies

Costing is the allocation of resources through a
system of several methodologies or techniques.
Costing is developed to support a company, profit, or
industry. Therefore this paper investigates how
organizations allocate resources, or in other term, the
costing system. This research is done to propose a
new costing system that is integration of
specification-based costing and target costing. The
case studies, strengths, weaknesses, opportunities,
threats, strength, weaknesses, 4 factors that influence
costing system selection by companies, and 17
advantages and disadvantages of target costing as an
advance of a costing system are further applied. The
SWOT analysis reveals that integration of
specification-based costing and target costing should
be performed by organizations in several industries.
Furthermore, organizations are suggested to identify
or detect a costing system through the 4 decision
factors. It is found that target costing is more relevant
to assist small, medium, or large-scale enterprises to
launch a costing system as it has 17 advantages and
just 6 drawbacks that can be viewed as a comparison
to other costing systems.

Target Costing

Target Costing methodology, it can be adopted in
accordance with the rules of the method, which is
directly related to generating competitive advantage.
In this way, sustainable advantage can be ensured by
the firm. In this work, it is also aimed to integrate
Costing-Based Costing (SBC) and TC methodology.
This will provide the automation of the product
design stage of TC with the logic of SBC. For this
purpose, a software infrastructure will be developed
that converts the product design into virtual

assemblies and that automatically calculates the cost
of the manufactured product according to the given
components, and thus enables the target cost and
target profit margins to be determined according to
the expected unit sales amount.
After analyzing the study on the design of a Life-Cycle
Costing (LCC) system, a novel methodology is
developed that couples TC and the Activity-Based
Costing (ABC) system. The proposed integrated
approach is called a life-cycle model that calculates
market-based target costs for sub-assemblies in both
purchasing and in-house manufacturing strategies.
Thus, manufacturing performance comparison is
achieved through calculated deviation indexes
considering

real

production

data.

For

the

implementation of the proposed methodology, a
computer program is developed by utilizing object-
oriented programming. With this new system, cost
engineers of a multi-function manufacturing
company can evaluate the production cost structure
of a potential product at the design stage of that
product, especially focusing on cost transparency
both for in-house and outsourced manufactured sub-
assemblies.
Target costing (TC) is a competitive measure to
manage a product's development, production, and
customer service processes. The pricing strategy
commonly relies on three steps. First, a profit margin
is determined. Next, market research and possible
market price expectations are explored. Finally,
target costing is performed for cross-functional
product development. Target costing is an approach
to product design with the objective of achieving a
predetermined cost. If a target cost cannot be
attained, the company, based on product competition
priorities, decides whether to continue with the
product or postpone it. Target costing first defined by
Toyota encourages price management considered to
be the idea of an uncompromising implementation
commitment significantly affecting competitive
advantage. Target costing is benchmarked to provide
for the allocation of product cost and simulations that
can lead to a targeted cost (Yuksel Pazarceviren &
Dede, 2015). comprehensive and effective material is
aimed packaging, and eventually to develop a new
model-based TC and activities in the actual
realization of this application-based costing. Beside
the suggestion, respectively, the method is based on
the establishment of the target cost and target costing
in order to use also The study was prepared as a
result of processing the current state review. Thus,
this study also provides a guide for companies on the
implementation of target costing with steps. The

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principal is, first of all, estimated the target costs with
traditional way, and activities in actual production
design as a result to calculate target costs and costing
target cost (Yuksel Pazarceviren & Celayir, 2014).

Principles of Target Costing

Target costing emerged in Japan in the early 1970s as
a way of gaining competitive advantage in the context
of fierce global competition. It is currently employed
by some companies in America and Britain. A move
toward target costing has been observed in the
motor, electronics, and banking sectors in Turkey.
Although still at the experimental stage in Turkey, it
is envisaged that the system will be adopted more
widely in the future. Target costing can be defined as
a corporate strategy employed in planning and
controlling costs to achieve predetermined market
targets in the life cycle of a product, from initial
design

through

to

research,

development,

production, and after-sales service. Market variables
are the main input in the formation of target costing,
which highlights both cost control and cost reduction.
It is based on the idea that cost reductions in target
prices and cost planning at the design and
development stage provide an important competitive
advantage. Target costs define constraints within
which new products or projects are expected to
function. Target costing is a system aimed at profit
protection since it tries to maximise profit under
competitive market constraints of price. Target
costing is best used at the product development
stage. It is difficult, although not impossible, to
change the cost structure of a product already in the
market without damaging its competitiveness. For
the same reason, it is impossible to establish a target
cost for a product/project already in the market.
Despite this, it could be implemented for product
improvements. Commentators suggest that small
firms and sectors in search of high-added value
products and industries can benefit from target
costing. Targeting to maintain additional financial
constraints is an important condition of target
costing implementation. It is stressed that in the long-
term the dealer and customer can both gain and lose
as a result of competitive pricing. It is suggested that
all industrialists should play a part in shaping policies
in such a way as the creation of long-term economic
costs for the market can be avoided. Targeting to
make flow the production process in a simpler, more
practical and more efficient way The relationship
between ABC and target costing is clear; the most
important factors which should be reduced in the

costing of the structure of the prime cost required for
the new product are: Reduction of the data part of the
working process in order to put a production plan in
place, i.e. working part of the time cost, the creation
of the part due to the standart time and standart time
cost of the work, direct material consumption relying
on how much of the product to be used in the
standart, the unit labor cost of the direct worker
engaged in the product, the part consumed by the
standart and the part responsible for the standart,
Royalties in terms of keeping only the standards
work performed outside the company and the
company; The codereductionpayer of the entire cost
plethora of additional part in order to put forward the
standart structure in enterprise overhead costs; the
only method can be applied to the data which is
generated as a result of this effort to ABG at; the only
method can be applied to the data which is generated
as a result of this effort to ABG at. Given how the cost
will do the operating after about a "standard cost of
developing a single product to be produced," said
standardization of overtime cost-effective time
production process to be followed without
interruption sitelendirmeloy closing and desired goal
can be achieved, it can be seen that the mass costing
in accordance with TC merit are submitted to the
standartsworking" concept until the end of the
product a helpful proposal draft model. Do not forget
that the market cost of the product planned a
suggestion "target cost model based on ABC" with a
small manufacturer can be a standout for the new
production. (Yuksel Pazarceviren & Dede, 2015)

Implementation Strategies

The Implementation Process: Determine Target
Costing Project: The products for target costing or the
parts constituting the product group are identified.
The time is determined for the project. Formation of
the Cross-functional Team: The team, which has
representatives from all related groups, is
established. The team can be internal, customer and
vendor. Customer and vendor can also be
represented as sub-management. Determining the
Target Cost: The maximum cost the product can
afford is determined in order to ensure the company
profit. If the products are aimed to be sold in the
domestic/international market, the market selling
price is effective when determined. Target cost; it is
the difference between the target profitability rate
and the expected selling price, considering the
product group competition rate, the expected
customer purchasing capacity and the increase in

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productivity and efficiency in a suitable period. If it is
requested by the customers or the sector is critical,
the secondary and down products are accepted and
the profitability is improved. Creating Pricing
Mechanism and Win-Win Approach: The team
members are informed about the studies and the
resistance of the staff is given. Cost, quality, design
and manufacturing reviews have been made. The
costing process will be facilitated by the
simplification and standardization of the design, the
price information related to the material is requested,
the material list and weight is demanded, the
mechanical drawing is requested. Target price should
be controlled in the process of determining the sale
price, necessary working conditions should be
created for the necessary negotiation with the
vendors for cost reduction, and Cost model which will
make the explanation of cost in a transparent way
should be prepared. Cost Erosion Analysis: Target
costs are shared with vendors. The deviations of the
vendors should be shown with color coding, balance
erosion should be looked at. Studies are shared with
vendors and the most accurate cost reduction
technique is applied. Realization of Cost Reduction
Studies: The target cost of each component and base
assembly, the introduction module or the concept
product is analyzed and process-oriented cost goals
are determined. Dependent and independent
components are identified, cost models are created.
Reducing the target cost of the dependent component
is targeted. Independent components should be
analyzed and the cost difference from similar
components should be determined. A balance erosion
should be paid. Setting Cost Target for Senior
Management and Preparation of Actual-Cost
Relationship: Determining the cost of the product
with the target bottom-up, the target cost deducting
the expected cost of the basic component, the
verification of the cost of the basic component by
means of the working conditions has been created in
cooperation with the suppliers, and this cost should
be shared with the related suppliers. Efforts to reduce
the remaining cost are explained by its real price.
Compliance with the target cost is probed.
Understanding reluctance must be shown with facts.
Product consumption cost should be calculated
considering the portion of the product, ease of
production, and number of products using the part.
Formation of Innovation Teams: It is stated that the
product or module can be redesigned after the
material standardizations are completed and the high
principle price is seen so as not to reach the targeted
cost level. The redesign of the product affects the
planned series decrease and the life of the product

should not take longer than expected.

Integration of Costing Approaches

The cost has an essential role in economic choices,
since it is linked with the productive technique and to
the events happened inside the enterprise. The
technique of management control is a manner of the
costs, which works with coordination, planning, and
productivity. In every business organization, the
specification-based costing has been quality control
that has become important for every aspect.
Specification-based costing is the discipline of
quantifying the costs on production to assess
adequacy

of

quality

procedures.

Business

organization’s achievement is largely determined by

the capability of getting the reliance of cost
information. In the last 20 years, the business

organization’s

competitiveness

has

faced

considerably

greater

challenges

(Yuksel

Pazarceviren & Celayir, 2014). It was indicated that
the business organization is really required the
accurate cost information for the prevision of future
pricing and control over the product cost. In this
atmosphere, business organization has adopted a
target costing. The target costing is the discipline of
profitability analyzing of the projected products
necessitating design and the cost controlling the
parameter to achieve the targeted profit. Later
projected product development was completed; the
target profitability product may not be released with
a competitive price through the cost division. In

target costing’s perspective it

is therefore important

to test the compatibility of the targeted cost (ENGH et
al., 2018). In the other side, the enterprises are
expected to capable of obtaining the profit that has
been planned and this is required the complete
strategic actions.
The system established will blend the use of the ISO
procedures and computerized costing procedures to
handle and distribute data. The establishment of
these computers and procedures guarantees that it

will provide information regarding a product’s cost to

the different functional area and management. The
focus will be an optimization chain as many different
processes. The proposed change can be quite random

and dependent on the employee’s judgement and so

will profits change. In addition, a lot of the
management will actively make choices, depending
on the output of what they are given. This was
determined by situational related to constraints
concerning specifications, consumable expensive
resources, planning, energy, and the other. Though is

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where a systematic approach will be described to
these problems, which is based on manipulation of
different components which will account for the
possible interactions. This research will also include
the suitable examples to illustrate. Every business
that produced goods uses the form of product costing.
This is used as a planning, tracking, and control
method. It is necessary for a business to make sure
that the cost applied to each product or for a
customer order is the unswerving costs have been
incurred in regard to that product.

Synergies between Approaches

While each of the above-mentioned cost management
methodologies is of great importance, the fruitful
harmonization of these methods may bring about a
significant competitive advantage. This chapter
specifically focuses on the harmonization of SBP and
TC, providing a much-discussed issue in the
specialized literature. Following the structure of the
existing literatures, the causes of hybridization of SBP
and TC are investigated and a conceptual model is
developed. After that, the methodology of
implementation is explained and the potential
benefits of the simultaneous use of both methods for
companies

have

been

expressed

(Yuksel

Pazarceviren & Dede, 2015). Finally, to uncover the
potential obstacles in the implementation of models,
a case analysis will be presented. Large, middle-sized,
and especially small-sized companies should make
accurate and effective management decisions on the

costs to survive in today’s globalized, competitive,

and complex business environment (Yuksel
Pazarceviren & Celayir, 2014). To make such
decisions that will ensure the company profitability,
cost accounting systems and methods are of utmost
importance. Efforts to decrease the costs and
increase the profits by determining the costs of goods
or services have been ongoing since the industrial
revolution in the 18th century, but since the 1960s, a
noticeable intensification has been observed in these
efforts.
The type of industry, political and economic
environment, and the organizational structure of the
company impose changes in the cost management
techniques. The cost management methods, SBP and
TC, are developed analytically at first, and then are
discussed in regard to their position in the extant
literature. Finally, the synergy among SBP and TC is
explored. Since large companies that have high
competitiveness

are

suppressed

by

market

conditions, the more intensified use of the cost

management

techniques

by

the

small-sized

companies is required. This study will provide small-
sized companies with a model to enable them to
compete with large companies. Target costing (TC),
as a management accounting system, can be used as a
bridge between the SBP and Quality Management
Systems (QMS). The temperature of the food stored
inside the industrial chillers is a critical factor that
should be carefully managed. In most countries,
checking the temperature of food is controlled by the
food quality regulations imposed by the ministry of
health of the respective country.

Framework for Integration

This section presents a framework that is designed to
integrate specification based costing and target
costing. The integration aim is to provide competitive
advantage through a more technically rigorous
approach to setting cost targets for design-to-cost
purposes. The approach requires a detailed
understanding of cost trade-offs within the value
chains of both firms and suppliers. Enforcement of
these trade-offs must be maintained continuously
across changes in target and progress payments to
prevent cost shifting.
The basic framework for supporting this approach
involves the following components: (1) A most
capable supplier selection process based on the
ability of suppliers to consistently provide
competitive cost, time, quality, technology, and
horizontal transfer and sharing. (2) A greater
supplier involvement in product development and
productivity measurement assistance. (3) A product
characteristic modeling technique for predicting cost

as a function of a product’s most granular technical

parameters. Cost trade-offs from prototype testing
are used to build these relationships. Manufacturer
and supplier maintenance of cost characteristic
databases support the continuous re-estimation of
part cost using the models. (4) A method for
translating these part cost bounds to product level

cost bounds. (5) Each manufacturer’s definition and

continuous maintenance of exactly what costs are

enforceable on which tier(s) of each product’s value

chain. This includes multiple value chains for like
components. (6) Part level cost measurement and
cost data concealment among the manufacturers and
suppliers. Cost concealment is achieved through
Agreement on the supplier sign-on to common use of
costing software, support of strong statement of work
contracts

specifying

allowable

cost

data

communication and part cost measurement

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techniques, and frequent on-site audits.

Practical Considerations

Manufacturer and supplier companies operating in
Defense Industry are obliged with the contracts to
submit the bids according to specifications that are
determined by the customer. In the case of contracts
of mass products or commercial goods, a company
can obtain some quotations from the suppliers and
has an idea about the prices and delivery schedule.
However, unlike others, the defense industry
contracts are executed on the basis of cost contracts
and no quotation is received for the inputs. This may
lead companies to some serious bid errors. Besides,
in many cases the bidders may declare prices below
the cost of the product, in case of a competitive
environment. This situation clearly underlines the
need of a cost evaluation as a complement of
technical evaluation. After all, the achievement of the
companies mostly depends on the accuracy of the
cost information determined. In this study, a sample
application is explained integrating the COSTART
model, that is based on ABC, with the Target Costing
(TC) method, to be used in determination of target
cost. Besides the sample cost data used in applying
method have been collected from real life example,
the detailed implementation processes were omitted
for the sake of understanding (Yuksel Pazarceviren &
Celayir, 2014).

Impact on Competitive Advantage

Target Costing emerged as a systematic production
development and cost management strategy in the
late 1980s. This method is widely used in Europe, the
United States and especially in Japan and Brazil. As
well as many two-stage productions in many firms,
high production costs in the transformation process
from semi-finish product to finish product have
forced them in the face of foreign competition. This
situation increases the importance of designing
products that provide the desired usage value to the
customer at the lowest cost.
Improving traditional costing techniques can't
provide the expected benefit in cost control function.
Target Costing approach is expected to provide a
basis for design-to-cost studies besides activity-
based costing models, which are used in cost
management through activities of cost. Vehicles,
home appliances, and ready-to-wear industries, a
large number of two-stage production is observed in
companies. Press operations are sold by specialized
firms, and roll-forming, soldering or semi-finish

cabinet production is transported. Target costing is a
cost planning and reduction system that fits more
integrated to the general decision of the company. At
the stage of market research and needs, target costing
acts as a mediator in directing research and
development activities. Target costing works more
selectively on product families (Yuksel Pazarceviren
& Dede, 2015). Target costing activities are highly
special for newly developing products or semi-finish
import replacement productions. Establishment of a
general cost reduction consciousness in the
establishment with the works carried out is foreseen
at the end of a certain time. The reduction of costs at
the factory and supplying of the semi-finished
product at the desired total cost occurs as a prime
cause. There is a market demand for low price
products that shape most of the Turkish economy.
With the difficulties experienced in production, it
seems inevitable to make design-to-cost studies
essential to break the vicious circle. The main
purpose of the firms is to determine the market price
of the product with a defined quality and to design the
product to be produced at the desired profit within
this cost limit. In the process of designing a product
within a target cost, the costs that can be changed are
the raw material costs, semi-products or semi-
finished products, the costs of the processes that are
carried out in this semi-product, the design and
mould costs of the products. Investments in
production systems on a limited model are expected
to be made, and drawing investments are expected
for the roll-forming of the semi-finished product
circuit front panel div group. The target cost
negotiation is aimed to be made effectively with all
the precautions. Calculation of the target cost should
know very well cost account. After the semi-fin
products are taken from outside with a market
examination, cost analysis of the existing semi-fin
circuit front panel div group is performed.
Preparation of the ABC model can provide the basis
for the most convenient bargaining process.
Alternative scenarios can be created with the
confidence created and the justification of the
calculations. It can be prevented that the cost buildup
is taken directly from the investment. Post-
investment attention was overshadowed the cost and
efficiency delight. How to reach the figures should
better be prepared and calculated. Competitive
investment conditions with domestic firms can be
offered to suppliers. With the work to be done, firstly
the most effective part of the cost is expected in this
way; cost decrease negotiation should start from the
beginning. According to this, it is necessary to give the
same sensitivity and importance to the circuit front

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panel div group. This part should also be included
in the scope of the work. Subsequent transportation
costs should be calculated separately and be sure of
the benefits of supplying semi-finished product from
outside. Again, investment is not an immediate return
(Yuksel Pazarceviren & Celayir, 2014). Post-
investment savings cannot be said to be permanently
due to price fluctuations, technological changes,
quality fluctuations and changes.

Cost Leadership Strategy

Attaining

cost

leadership

typically

requires

aggressive construction of efficient scale facilities and
vigorous pursuit of cost reductions through
experience, tight cost and overhead control, and cost
minimization in areas like R&D, service, and
advertising (Kowo et al., 2018). To achieve an overall
cost leadership position, low cost relative to
competitors is essential. Early movers and
technological innovators can lock in cost advantages
and deter entry; thus, no industry is immune to the
possibility of cost leadership. There are, nevertheless,
some careers susceptible to cost or price war and a
much larger number for which cost leadership is
feasible but not wise. Firms with low costs can still
earn returns after their competitors have competed
away their profits. And since excess returns are based
on top-of the-between-competitors scale economies,
durable, exploitable cost advantages are more likely
to give rise to a sustainable advantage. There are six
main sources of cost advantages for firms that
successfully adopt cost leadership. They are: Size
differences and economies of scale, experience
differences

and

learning-curve

economies,

differential low-cost access to productive inputs,
technological advantages independent of scale,
pioneering or early-mover advantages, and policy
choices. Sustainable cost leadership is possible in
those careers for which the relevant sources of cost
reductions are likely to be both durable and sizable.
The ability of a valuable cost leadership strategy to
create a sustainable competitive advantage is
conditional upon the strategy being rare and costly to
imitate. Sources of cost advantage are classified into
likely-to-be-rare

and

less-likely-to-be-rare

categories. Each source also comes in two types: cost
drivers the firm can control and those it cannot.
Hence, Net Deliverable Benefit is a continuum and not
a black and white issue. This highlights the extreme
value to firms of accurately evaluating their cost
leadership potential.

Differentiation Strategy

A firm must have a most efficient cost management
model in order to be preferred in a competitive
environment. Demand for services of a company that
has better quality products increases, while market
share shrinks for companies producing at higher
costs to get worth for the services. Therefore, in the
determination of production strategies, cost
management and pricing, indicators of market
conditions and desired market share should be
considered. Prudent companies implementing a
range of strategies provide their firms with some
competitive advantage by improving the decisions on
the cost price of their products. It may be possible to
obtain some opinion on the cost by using
specification-based costing and then it may be
possible to have a competitive advantage by taking
advantage of better specification-based costing. It can
also get an opportunity to lower the specified costs at
this stage. Proposal of a model is presented in this
respect. This model is designed to integrate the
specification-based costing method with the target
costing system as an add-on to the existing system.
There are three options available in the market
approach to obtain the internal cost and price opinion
of a new project or for the making of a new product.
The comparability rates are very low in this respect
for conventional costing methods, so that there is a
possibility of damaging the competition. Target
costing has an important role in the products'
variable costing costs before products marketing.
However, losses due to this method can be
determined and a common product range should not
be entered throughout the company. It is also
possible to be sunder from the failure to make the
desired speculation-based costing by comparing
similar jobs. Proposed model, which is an add-on
model cost-effective for firms using activity-based
costing, is not an option that is directly opposed to the
existing systems of firms. System overrides are
carried out by obtaining information through the
integration of systems through their own programs.
Proposed model is aimed to provide firms producing
innovative products with a competitive advantage by
integrating target costing systems with cost-based
cost calculation methods. There are two primary
information and 17 sub-information groupings used
in product filtering for this purpose.

Market Positioning

With the pace of globalization accelerating, the fierce
development of economy and technology in the world

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solidifies competitive conditions in enterprises
(Yuksel Pazarceviren & Celayir, 2014). In this
competitive environment, companies that aim to
survive and grow and to attain a sustainable
competitive advantage must attempt to create new
and innovative strategies. Cost has lost its importance
in the past and many researchers, analysts, and
managers were under the influence of J. A. Brimson's
emphasis and expression that "in the future, you will
need to implement strategies between cost
positions." Additionally, with strategies alone, it is
impossible to strengthen competitive situation;
obligations are to be supplemented in the
implementation phase (Yuksel Pazarceviren & Dede,
2015).
The relationship between strategies and products is
very close. Thus, in many types of research time-to-

time, it is mentioned that the corporations’ basic

strategy must be shaped specifically about the
product. This strategy is defined on the terms of the
quality level of the product, price setup, such as global
or local marketing. The TC model, which proposed in
this

study,

is

implemented

between

the

determination of product sales price for the desired
level in the determined market position with the help
of information from the customers and the
termination of the target cost of the product in
accordance with the target profit margin, which is
shown in the figure. Also, this implementation begins
before the product is targeted to be sold out, and
generally continues even after the product starts to
be sold. The TC application is launched with the
preliminary process that determines the market
positioning.

References

The purpose of this study is to create a model based
on activity-based costing in the processes of
determining target cost and realizing target costing.

Basic informations related to Target Costing, the
purpose of the method, the principles and the
implementation process are explained initially in the
study. Following this, basic informations regarding
activity-based costing and activity-based budgeting
are presented, and their correlation to target costing
is mentioned. Proposal of target cost model based on
activity-based costing is presented at the final
section. Indirect cost allocation in accordance with
the ABC is used as a base for proposing the model. An
activity is of work that consumes resources.
Recent changes due to global competition of
businesses and technological advancements lead to
innovations in the use of financial and non-financial
informations, and the accounting became the most
important tool of business management. Increases in
costs especially after the industrial revolution,
serious decreases in product prices, and prominent
global competition have incapacitated conventional
management and cost accounting methods. As a
result of this, methods such as Management, Time-
Based

Management,

Reengineering,

Flexible

Production Systems, Activity-based Costing have
been developed; target costing is also emerged as a
part of this process. In this method, operations are
oriented with respect to customer, intensity on
production design is highly risen and it extends to the
whole life cycle of the product. The starting point of
the target costing is strategic management consistent
with all business activities in an ever-changing, ever-
growing competition environment. Target costing is
a product development strategy that is concentrated
on customer expectations and new opportunities in
the market, and it is identified as management
process of strategical profit and cost. Target cost
management is regarded as an activity that aims to
reduce the costs of the product during its whole life
cycle and to satisfy customer requests such as
rapidity, quality and reliability.

Practical Aspect

1.

An Introductory Overview of Al-Narjis Company, the
Research Sample
Al-Narjis Company is one of the Iraqi private sector
companies established after 2003 in Basra
Governorate. A group of engineers with various
engineering, construction, and service specialties
fully owns the company. The company strives to
provide production using the latest technologies and
the highest levels of quality. Companies Law issued
the company's incorporation contract No. (21) of
1997 (as amended). The company was registered

with the Companies Registrar under the name (Al-
Narjis Contracting, General Trading, Design, and
Project Management Limited Liability), with multiple
activities, and with incorporation certificate number
(1709) dated November 5, 2005, with a capital of
(15,000,000,000) fifteen billion Iraqi dinars. Al-Narjis
Company is one of the Iraqi companies that has been
involved in business and competition since 2005,
especially after its capital was increased to
25,000,000,000 (twenty-five billion Iraqi dinars). In
addition to its in-kind capital, including machinery,
equipment, and logistical infrastructure, it owns
other companies specializing in contracting,

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22

mechanical, construction, and electrical works.
Among these companies is Al-Narjis Pipes Limited
Liability Company (the study sample), as well as

factories and other companies owned by the parent
company (Al-Narjis Company).

The Costing System Used by the Company

Al-Narjis Pipes Production Company relies on the
electronic accounting program Mega Cash to manage
its accounts, including recording, documenting,

processing, and reporting its financial and cost
transactions through the unified accounting system.
Based on this program, the company's accounts are
divided into four main accounts:

Directory Number Account Name

1 Assets

2 Liabilities and Equity

3 Expenses

4 Revenues

Under this program, the company records and
tabulates its cost data within the expense account.
This account includes the recording and tabulation of
all expenses incurred by the company. Accordingly,
production costs are calculated using the total cost

method to determine the product cost. The profit
margin determined by the company's management is
then added to this method for pricing the product.
Product cost is determined by adding the costs of raw
materials and other costs, which include all monthly
expenses. Other costs are charged to the product.

Production capacity of the UPVC pipe product

Monthly

periods for

the year

2022

Design

energy

available

energy

planned

energy

Actual

production

Actual

÷

Design

Actual ÷

Available

Actual ÷
Planned

31\1\2022

120

80

75

30

0.25

0.38

0.4

2\2022

120

80

70

38

0.32

0.48

0.54

3\2022

120

80

65

0

0

0

0

4\2022

120

80

60

21

0.18

0.26

0.32

5\2022

120

80

58

17

0.14

0.21

0.29

30\6\2022

120

80

68

16

0.13

0.2

0.24

Average

energy

utilization

rates %

0.17

0.25

0.3

The researcher notes from Table (20) that the
company's energy consumption is not significantly
utilised for the UPVC pipe product (10 bar \\ 1.5 mm
\\ 25 mm). This is despite the very large design
capacity available, in addition to the available energy,

which was not utilised to the required extent, as the
average utilisation rate did not exceed (17%, 25%),
which helps manage costs, especially fixed costs,
more efficiently and effectively. Actual production is
also weak, as the actual average production did not

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exceed 30% of the planned level, given the market's need for this product.

Company Sales of UPVC Pipes

Monthly

periods for

2022

Planned

sales

quantity

(tons)

Planned

selling

price

per ton

(in US

dollars)

Planned
revenue

(in

dollars)

Actual

sales

quantity

(tons)

Actual
selling

price

per ton

(in

dollars)

Actual

revenue

(in

dollars)

Sales

volume

%

Revenue

%

Average

sales

volume

and

revenue

ratio

January 22

75

2500

$

187,500

16

$ 35,970

2398

0.2

0.19

0.19

February 22

70

2500

$

175,000

15

$ 38,368

2398

0.23

0.2

0.2

March 22

65

2500

$

162,500

12

$ 28,776

2398

0.18

0.15

0.18

April 22

68

2500

$

170,000

10

$ 31,174

2398

0.19

0.18

0.19

May 22

68

2500

$

170,000

8

$ 23,980

2398

0.14

0.14

0.14

June 22

55

2500

$

137,500

14

$ 21,582

2398

0.13

0.18

0.19

Table (21) reveals to the researcher that the actual
sales volume and revenues for the UPVC pipe product
(25 mm\\1.5 mm\\10 bar) are fluctuating and
inconsistent with what was planned. They did not
exceed 50% of the planned sales volume and
revenues. The average ratio between actual and
planned sales volumes and revenues, according to the
periods indicated in the table above, was (19%
\\18%). This is considered a low percentage
compared to what the company seeks to achieve in
order to expand and acquire the largest possible
market share to achieve competitive and financial
stability. Several reasons can be identified for the
discrepancy between the planned and actual sales
volumes, prices, and revenues for the UPVC pipe
product (25 mm\\1.5 mm\\10 bar), including the

following:

• Increased competition in the market for these

products from both local and imported products.

• High selling prices due to high costs and the lack of

market research prior to pricing the product.

• The company's marketing and promotio

n

capabilities are weak, due to the lack of a sound
marketing policy, resulting in a lack of marketing,
persuasion, and lending channels. This is in addition
to the inflexibility of the mechanism by which the
company presents and distributes this product to
customers.

• The company's inability to take customer feedback

into account when planning and designing the
product,

in terms of specifications and pricing.

Materials and production stages associated with each UPVC pipe product specification

N

Materials

Size (Diameter,

Weight)

Durability (Thickness,

Durability)

Design

1

Al Ghadeer Resin

(PVC)

70%

30%

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2

Calcium Carbonate

30%

40%

30%

3

Heat Stabilizer

20%

65%

15%

4

Stearate Acid

10%

10%

20%

5

CPEIM888

75%

5%

10%

6

Processing

50%

50%

7

Wax

50%

50%

8

White Paint

(Blooming)

5%

95%

9

Adhesive Tape

5%

10

Packaging Materials

(Nylon Bags)

20%

20%

11

Production Activities

and Stages

1

Mixing Stage

100%

2

Crushing Stage

80%

20%

3

Extrusion Stage

50%

50%

4

Mould Stage

30%

30%

40%

5

Cooling Stage

50%

50%

6

Printing Stage

100%

7

Cutting Stage

80%

20%

8

Shaping Stage

80%

20%

9

Cooling Stage

100%

10

Storage

60%

20%

20%

11

Full Production

Warehouse

95%

5%

12

Preparation for

Customers

50%

50%

13

Al Ghadeer Resin

(PVC)

100%

100%

Costs associated with the production volume for the size specification for producing one ton of UPVC
pipe.

Raw Materials

Unit of

measurement

Quantity

Material binding

ratio for each

specification

Quantity

related to

specification

Weighted

price

Amount (USD)

(5 * 4)

Vinyl Resin (PVC)

Kg

680

70%

476

2

$ 952.00

Calcium

Carbonate

Kg

180

30%

54

0.16

$ 8.64

Heat Stabilizer

Kg

25

20%

5

2

$ 10.00

Titanium

Kg

10

15%

1.5

3.85

$ 5.78

Stearate Acid

Kg

2

10%

0.2

4

$ 0.80

CPEIM888

Kg

1

5%

0.05

5

$ 0.25

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White Pigment

(Flower)

Kg

1

5%

0.05

5

$ 0.25

Packaging

Materials (Nylon

Bag)

Kg

25

20%

5

1.5

$ 7.50

Total

$ 986.00

The time required for activities and production stages to achieve the size specification.

Production
Activities

and

Stages

Responsible
Department

Time required for each activity
and

production

stage

(in

minutes)

Time

correlation

ratio

for

each

specification

Number
of
workers

Total time in
minutes

Mixing Stage

Production

17

100%

1

17

Crushing Stage

Production

20

80%

1

16

Heating

Stage

(Oven)

Production

25

50%

1

12.5

Mould Stage

Production

123

30%

1

36.9

Cutting Stage

Production

20

20%

1

4

Packaging

Production

28

5%

1

1.4

CONCLUSION

Recent changes due to hybrid products and

technological variations lead to the formation of new
production management and controlling perceptions.

Target Costing and Activity-Based Costing appear as
originated from this need. The purpose of this study was

to criticize the deficiencies of the two systems when
applied separately, to make a general evaluation for the

advantages of the two systems that may occur in the
integration process. Basic information about the

combined system is described. In addition, use of the
system in a garment company is exemplified. In this

example, by determining the activities related to casual
clothing and their costs targeting for a magic jacket

design to be introduced to the market, target cost can be
easily determined and cheaper cost alternatives can be

found.

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Increases in economic integration after 1996 led to new

variations in products. After the 21st century especially,
electronic products which have a lot of properties at the

same time completely replaced conventional products.
As a result of this hybrid product trend, consumer

expectations have begun to change. Today, durable

products in which varied features can be seen are
demanded rather than standard properties. There have

been remarkable changes in the products. This new
trend led to the formation of a new production concept.

In addition, as a result of developing technology, the

design and production phases of the products are
separated from each other. In the hybrid product

concept, external firms perform all production
processes including purchasing and designing. As a

result, a greater variation of design and cost occurs.
Production companies find it difficult to adapt to this

change. Target costing and activity-based costing
appear as the most important products of this need.

However, companies in the same sector are in the habit
of allocating their overhead amount in an approximate

manner with traditional methods, and therefore cost
determination appears to fluctuate between companies.

Today, the product variety which is the driving force of
production makes the quality higher and causes new

things to enter the market.

REFERENCES

Yuksel Pazarceviren, S. & Celayir, D. (2014). TARGET
COSTING BASED ON THE ACTIVITY-BASED COSTING

METHOD AND A MODEL PROPOSAL.

[PDF]

Yuksel Pazarceviren, S. & Dede, B. (2015). LIFE CYCLE

COSTING MODEL BASED ON TARGET COSTING AND

ACTIVITY-BASED COSTING METHOD AND A MODEL
PROPOSAL.

[PDF]

Cinquini, L., Collini, P., Marelli, A., & Tenucci, A. (2008).

An exploration of the factors affecting the diffusion of

Advanced Costing techniques: a comparative analysis of
two surveys (1996-2005).

[PDF]

Nobumasa, S. (2018). The Innovation Mechanism in

Target Costing.

[PDF]

Maher AL-Khasawneh, S., Souliman Jrairah, T., Anisah

Endut, W., & Mohd Norfadzilah bin Nik Mohd Rashid, N.

(2019). The relationship between target costing
method and pricing - development of products in

industrial companies.

[PDF]

hakim Mustafa Joudeh, A., Abdllah Al-Attar, K., & S.

Alsoboa, S. (2016). The Extent of Using the Target

Costing

Technique

by

Jordanian

Industrial

Shareholding Companies.

[PDF]

ENGH, E., ZAHARIA, V., & BORDEIANU, D. (2018). A

SYSTEM OF MANAGEMENT INTEGRATION OF

PRODUCT COSTING IN INDUSTRY.

[PDF]

Kowo, S., Sabitu, O., & Adegbite, G. (2018). Influence of

competitive strategies on corporate performance of

small and medium enterprises: a case from Nigeria.

[PDF]