Reducing Costs in Manufacturing Firms by Using Target Costing Technique

Abstract

The main study purpose is to explore: 1) whether the use of traditional methods leads to higher costs; 2) whether the use of target costing technique leads to lowering costs and increasing the profit margin of the firm. This paper is based on case study data, collected at one manufacturing firm (furniture). Target costing is a relatively simple technique and easy to understand and apply, although it has a significant impact on the profitability and competitive advantage of firms. The major study results include the following: 1) cost-based pricing in the factory leads to higher prices and an inability to compete; 2) the application of the target costing technique led to achieving a reduction in costs to the target reduction using tear-down analysis and value engineering. Moreover, it is also possible to confront local and foreign competition in a clear and orderly manner. The study also concluded that this technique has succeeded in lowering costs when applied in the factory (the study sample).