Joseph F. Castellano

Speed Splasher: an interactive, team-based target costing exercise

Abstract Target costing is an important strategic cost management topic. The competitive business environment requires firms to produce products with the quality and functionality demanded by customers while at the same time selling them for prices largely determined by the market. Conventional cost management and cost plus pricing strategies are not very effective in this new environment. The design-centered and market-driven focus of the target costing process and the inability of firms to trade off quality and functionality to achieve target costs, are concepts not always easy to demonstrate in an accounting exercise. To overcome this problem, the authors have developed an interactive, in-class, team-based target costing exercise. This problem involves students in the dynamic process required to bring a product to market that simultaneously meets customer requirements for quality, functionality, and price-cost, and the firms target profit requirement. The authors describe and explain this exercise, and provide guidelines for conducting the exercise in class.