Cost driver analysis

Cost drivers are factors, which determine the costs of an activity i.e. a change in the cost driver will cause a change in the level of total cost related cost object. The cost drivers can either be volume based or transaction based. The company must therefore understand its cost drivers so as to control costs.

Target costing

This is another contribution to strategic management accounting. This is an approach to product pricing widely applied by Japanese companies and now being given a lot of attention in the USA and Europe. It is determined by exterior market factors.

A target market price is recognized by marketing management former to designing and introducing a latest product. This target price is put at a level which will allow the company to attain a desired market share and sales volume. A preferred profit margin (target profit) is then deducted to determine the target maximum allowable product cost (target cost).

Product costs are computed based on design specification and compared with the target cost. If the projected product cost is above the target cost then product designer’s focus on it becomes cheaper to produce. Manufacturing engineers also focus on methods of improving production efficiency so that the target cost can be achieved even after a period of one to two years. A team of designers, engineers, marketing and production personnel, together with the management accountant, concentrate on producing a product that meets the target cost requirement. The role of the management accountant is to produce cost estimates for the various projected product designs, measure and monitor product costs once the production process begins.