Target Costing & Life Cycle Costing Systems

609 words (2 pages) Essay in Accounting

20/12/17 Accounting Reference this

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Letscommunicate Ltd

Introduction

Letscommunicate Ltd produces mobile phones for sale in supermarkets. In today’s competitive market of mobile phones with short product life cycles, it is important for mobile phone producers to develop and market products that not only meets the customers demand for features at a certain price level but also generate the desired profits. This essay analyses the benefits and limitations of using target costing and life-cycle costing systems over the existing costing and performance measures used by the company. The current techniques used by the company are useful for keeping costs under control but they do not provide an indication of either the maximum costs allowable for defined product features or profits over the total life of a product.

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Target costing

Target costing is a method to determine the cost at which a product with specified parameters must be produced to generate the required rate of return. It involves cost analysis during the developmental phase as well to keep the overall costs below the threshold. The cost control techniques currently used by the company are useful in managing costs during production stage. However, moving cost management efforts from the production stage to the product development stage translates into higher profits because of lower costs . This is particularly useful for companies producing mobile phones for supermarkets because supermarkets drive tougher bargains.

The benefits of target costing are higher if specific targets for costs and product features are established earlier in the product development cycle . Cost analysis in earlier stages of the product development may indicate whether it is feasible to produce a mobile phone that not only meet customers’ expectations of price and quality but also generates the desired returns for Letscommunicate Ltd. Also, modifications to the product in the initial development stages cost less and will increase the company’s profit and ability to compete better.

However, the target costing concept will take lower priority if Letscommunicate were to focus on meeting fast time-to-market demands because of shorter time to launch a mobile phone . It is also difficult to forecast price in the future due to rapid technology developments in mobile phones and changes in customer preferences .

Life-cycle costing systems

The competitive nature of the mobile sector means that mobile producers have to not only manage with lower profit margins and shorter product life but also spend a significant amount on developing new products and features. This means that costing methods like absorption costing systems that only look at production costs are less useful because they neglect research and development costs in evaluating profitability of a product. Life-cycle costing systems overcome this drawback as they evaluate costing from the research and development phase through to the eventual conclusion of a product’s life. This approach is useful in determining the overall profits from a product like a mobile phone that has high development costs and a short product life due to new products being launched constantly by competitors.

The major challenge of using the life-cycle costing system is that it would be difficult for Letscommunicate to estimate full life-cycles of a mobile phone in a rapidly changing environment and increasing competition.

Conclusion

Target costing overcomes some of the drawbacks of the current costing and performance techniques used by Letscommunicate as it focuses on maximum allowable costs during the development phase so that the company can generate the required returns. Life-cycle costing is useful as it will incorporate high development costs and short product life in determining the feasibility of a product.

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