Int. j. econ. manag. soc. sci., Vol(3), No (9), September, 2014. pp.

516-520

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International Journal of Economy, Management and Social Sciences

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Evaluation of the target costing model in the textile and apparel industry
Nikzad Amiri *
Qom Science and Research Branch of the Islamic Azad University, Qom, Iran.

Hamed Afzali
Qom Science and Research Branch of the Islamic Azad University, Qom, Iran.
*Corresponding author: nikzad.amiri@gmail.com

Keywords

Abstract

Costing
Target costing
Price target
Market
Product development

The prime cost and product innovation have always been important in the textile and apparel industry. The
survival of a company in the market depends on providing a good product with a good price. The traditional
approach develops the product and then the market approach will follow this target with the cost which is
based on the premium calculation. The product costing can change the process through a movement from
this price towards the market price and reducing the earning target to reach a price target. Product
development takes place in an environment where the market price and acceptable costs are available for a
given product. In this paper, we will discuss the target costing process for the textile and apparel industry
and the implications of this approach.
We will also try to analyze the rules which move the textile and apparel industry towards the target costing.

1.

Introduction

Since the large industries have started to work, textile and apparel industry in terms of cost awareness and product innovation have pioneered. In
the apparel industry, innovation development and fashion were two factors of progress driving and it took times for the textile art to update itself
against the new products and new markets. Initially, industries were using the emergency costing technique to control the production costs and to
determine the price of the products. (Hergeth, 1996). With better and more efficient transportation costs and faster communications the
competition became more intense and in many cases it became price oriented. The timing of product development became a greater factor than
before and the factories were not able to introduce their products by a wrong price or a low quality level. The target costing is an available tool
for the industries which prevent the wrong pricing and help to focus on a better and faster product development.

2.

Traditional costing and pricing

The product development traditionally starts in research and development section of the company and with designing a developed initial product.
This section is usually made of a designing group, a research laboratory, an engineering team and any other group which is capable of
developing the products. The first idea for this product can be marketed or it can be the result of partners' effort at the company. After the initial
product's designing, we can calculate the product price by adding all the costs and the expected profit. If the price was acceptable in the market,
we can introduce and provide the product to the potential customer but if the price is more than the market price, the product should be
redesigned to be able to compete with the market price or otherwise it should be halted. Product redesign in the means of cost reduction is really
difficult because the factors like: the cost of direct materials, marketing costs, and distribution costs that were fixed during the first step of the
designing will change. Sample estimations show that a product will be free from 70% to 80% of the total costs after the designing phase.
(Cooper & Chew 1996) Traditional standard costing methods are beneficial in the situations where the true cost includes in the budget limits or
date range. But these methods have no relation with market realities or any management effort towards the price reduction.
When we use the traditional costing methods for the evaluation of new products, many feedback cycles are needed and the product development
cycle time is less predictable. Using the traditional costing methods after many changes that take place in development, research and production
may change to product designing which leads to costly consequences for the company. The application of these methods may result in the
cessation of the products at the stage of product development which a lot of money, time and effort have been spent for them.
Of course, it's possible for a new product is priced too low. This happens when the company realizes that it provided the products at higher
prices.
One of the indices of this subject is "the waiting line of the customers for buying". For example the wholesale by retailers or extending the
delivery times of sent goods can show such situation. (Butscher & Laker, 2000)
Actually the ignored profit can't be fabricated and most of the time it's very difficult or impossible to ignore this profit by the means of correcting
or increasing the prices in the product's longevity. There are several reasons why a new product with a wrong price is introduced to the market.
A product may be over-designed; it means that the product provides more accurate information about customers' demand or using raw materials
with a much higher quality level than the desirable performance. Sometimes the product specifications may be desirable but not in the prime cost
that it can be offered by. The main reason behind the wrong pricing is that the product can't show a view of product cost unless the product be
designed completely and a sample be made. The target costing tries to address this issue by transferring the total primary cost to the product
development.

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Evaluation of the target costing model in the textile and apparel industry
International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

3.

Target costing

The target costing discusses the primary evaluation of a target price and then designing the product to reach that price. Usually, the target costing
takes a part of the prime cost management system. It means that the target costing, leads the traditional financial accounting towards traditional
accounting. In this paper, some aspects of target costing that are the integrated part of the product development process will be discussed. While
there are many records that show the Japanese companies were using the target costing (e.g. Hiromoto, 1991, Tanaka, 1993, Cooper, 1995) but
the primary application of price based costing can be seen in the philosophy of Ford motor company in its first years of working. (Shank &
Fisher, 1999). The process of target costing has been discussed with some examples in montage (assembly) industry. The target costing can be
made easier for the assembled products in order to allocate the various functions with specific functional components. Many researchers have
been said that the target costing is more beneficial for the montage-oriented industries (producers of automobiles, electronic devices companies
and etc.) than the process-oriented producers (Morgan 1993, Discenza 1995). They also have been said that the target costing is more applicable
for the industries with repeated product changes and short life cycles (Gagne & Discenza 1993, Lee 1994). This factor is appropriate for many
companies in fashion-oriented apparel industry in which the products have short life time and the industrial actuators change more than any other
factor. Processes in the apparel industry are often montage- oriented. However, a number of components are typically smaller and they're often
supplied by smaller number of suppliers. (E.g. in automobile or air-plane production)
On the other hand, the textile operation is a process-oriented operation and the product operation is created by separate processing or few raw
materials. Instead of looking for separate product components we have to evaluate the different processes or production levels. Many researchers
have been noticed that the target costing should be used in these industries. Shank and fisher (1999) have shown that there are several product
innovations in electronics and automobile industry which correct the current product and they also have shown the target costing application in a
paper mill with different processes and products which are very similar to textile processes and products. Cooper and Chew (1996) have done a
research on the concept of target costing for industrial processes and services; they have shown that the key concepts of costing will remain
unchanged. Some other researches were also reported by Brausch 1994, Hergeth 2201). There are some additional differences between the
sections of the montage industry and the textile and apparel industry. In fact, several textile companies produce intermediate products and they
don't supply their final product to the final customer. So from this point of view it seems that that the clothing industry be more similar to target
costing users. The clothing industry uses the components, some through the buying, some through the production in the factories, some through
the fashion and changing the products, to provide its products to the market. However the target costing rarely takes its full extent in this
industry. One of the significant differences between the concept of target costing and standard costing techniques is the fact that these to
techniques have the tendency to accept current structures and just are leading to lower incremental costs; the target of standard costing is the
evaluation of the real prime cost of a standard. This standard can be achieved through the evaluation of the prime cost in a process of normal
condition which results in the acceptance of the current process. The target costing has the tendency to be more fundamental and make an
opportunity for a new and innovative process. (Shank &Fisher 1999, Corrigan 1996, Slagmolder)

4.

Target costing process

The target costing process is assumed highly interactive and most of its relative activities happen parallel or concurrently. Despite the
interdependencies between the different activities, the identifying of three phases or three basic levels would be really crucial in this process:
Market level, product level, and the component level (Cooper & Slagmulder 1999). In the following table it will be shown how to implement this
approach in the textile and apparel industry:
Table 1. The basic steps of target costing (Cooper & Slagmulder 1999)
Market level

Product level

Component level

Long term plans of the company

Target price
Target profit
Target cost

Product design in order to achieve the

target price
Component evaluation

Component design in order to achieve the

functions in target price
Suppliers' management

4.1 market level

The first step of target costing process results in the evaluation of product's target price. This is a basic difference between the target costing and
the traditional costing methods. The target costing is price based and therefore, it's rooted in market. In many cases, this price can be a price for a
new product or a price reassessment of a current product. In any case of the target costing, the starting point of appraisal is the market price but
not the local standard price or the estimated cost (Shank & Fisher 1999).
There is already a market price for the existing products and it should be evaluated based on activities of the competitors. The potential price
reduction should be predicted in the market and there should be some actions to prevent the unexpected events and to help the price reduction to
be acceptable. Forecasting the price reduction in the market is really important for analyzing the market because there may be a need of different
pricing strategies for the different product functions and markets. So it's really important for us to discuss the long term strategies of the
company. In many cases it is required to estimate the relation between the price and the share or market volume to be able to find an optimal
price range. For the new products, the process of finding the market price starts with identification of the target market. We also have to focus on
the fundamental needs of the product which are defined for a group of potential customers. A detailed comparative analysis should evaluate what
types of products are available to potential customers and what changes are expected in providing a new product to the market. Then these two
activities result in a specific definition for the target market and the target group. After defining the target group, we will estimate the customers'
demands. Understanding and ranking the customers' demands, are the key elements of the target costing and the product development. In the
next activity, we will determine the product specifications that can meet the customers' demands at a specific functioning level (Ansari et. Al.
1997) table 2 shows an example of customers' demands for a face & hands towel

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International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

Table 2. An example of customers' demands ranking

Demands

Ranking(1= not important, 5= very important)

Raw score

Score percentage (the ranking of related characteristics)

Dry and comfortable

28%

Large size

17%

Persistence

22%

Longevity

22%

Appearance

11%

18

100%

Total

This table shows the company which characteristics are less/more important to the customers. In practice, there may be a condition in which the
company be forced to delete some basic requests of the clients, such as the safety features or the other requests which don't allow any difference
to be happened between the company's products and the products of the other companies. For example, all the automobiles should have seat
belts and all the shirts should have buttons. The market researches show the specific price which is acceptable by the clients. Moreover, the
companies try to make an economical analyzing to estimate the relationship between the product price and the market share and then they will
also estimate the target price which is expected by the market.
In the textile art, it appears that market prices are readily available, at least for standard products. However the understood analyses can be
beneficial for the different customers. The concept of the retail price is appropriately designated and commonly used in the apparel industry. At
least in the retail trade, the target group will be provided through a specific price range and for a specific kind of product and the retailers choose
their type of businesses based on these rules.
It has to be noted that this type of research may be really difficult specially, when we examine the new products. A direct query about the
relationship between the characteristics and the functions of the product may make these kinds of difficulties. So we have to use the joint
analysis and other market researches' tools. (Kotler2003). The purpose of this market aspect is estimating the market price and a list of evaluated
characteristics and product functions.
The last step of the market level is the target profit determination. For a specific product, target profit is based on the long term strategy of the
company and also the short term strategy of the market share. Usually, this target profit is based on the returns on sale, returns on assets and the
profit planning purposes. (Ansari et.al., 1997). The actual target price is simply the target price minus the target profit.
4.2 Product level
The second phase of the target costing is the "product level" which deals with the design of the product so that can reach the price of the product.
The first step on this phase is the determination of current situation and the evaluation of the total cost which depends on the experiences of the
current price of the current product. Usually there are several data available at the textile and apparel companies which are collected by the
traditional standard costing system and may need an additional work to separate the costs by the components. In general, this evaluation for new
products is done by the approximate price and through the comparison with similar or current products. The comparison of this price with the
target price can make a price distance which shows how much the company should reduce its products price. At the next step, the design price of
out of the product takes place. It means that at the designing time, the product price includes the driving processes. The potential effect of the
design on all the price factors can affect the plan - choosing. This is really important to focus on the total needed price which should be
considered at this stage like the necessities, production, distribution, and the customer service. The price may be affected by the product design
at any stage and we have to focus on it before using any sources in these areas. The really important difference between the costing and
traditional product pricing is the market orientation and price- oriented product design. During the process, the target price, remains as an
important target, it means that it will not increase in any situation. In the traditional cost-oriented pricing, the product design determines the price
according to the component price and the exchange price.
The important techniques of price design through the product include: value engineering (VE), design for montage and production (DFMA), and
quality function development (QFD) (Cooper & Slagmulder, 1999)
Value is defined as a function/price and it reacts to the producers' point of view. The understood value is defined as an understood price/profits
and explains the customers' viewpoint. Quality function deployment is a matrix which relates the customers' demands and their importance with
the product or component function. The result of the quality function is really important for all the product components in the means of
analyzing the functional price. At the same time, the quality function deployment explains a process about the target costing and its related issues
which work with the assembled products (e.g. the producers of coffee, computer, automobile and etc.). The target costing discusses the processoriented manufacturing and also this matrix presents some information about the competition condition for the customer demands.
Table 3 shows an example of a quality function deployment matrix. And the customer demands were discussed for the parameters of a towel in
the table 2. The correlations between the client demands and the parameters are determined by the company engineers.
Table 3. The quality function deployment matrix (QFD) for the towel, from the table 2
The design parameters? Demands?

Nap of a cloth

Color stability

Woof

Cockle

designs

Dryness and convenience

75%

5%

20%

Large size

30%

35%

35%

Persistence

50%

50%

Longevity

20%

30%

25%

10%

15%

Appearance

20%

5%

5%

10%

60%

(Brausch 1994, Shank & Fisher 1999, Hergeth 2001, Chen et. Al. 2002)

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International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

The production process can't be easily considered as an independent component and usually their presence in independent from the specific
function which is required by the customers. Instead of connecting the customers' demands to the product components you have to analyze the
finished work by the price components (e.g. the raw material. Material parts, equipment cost, exchange cost, distribution cost and tec. (Shank &
Fisher1999).
4.3 Component level
The third phase, is the component level which in many cases, happens parallel to the product level in the target costing process. Based on the
product, the separate components will be divided to sub-performances and a process similar to the second phase will starts. In general, the
component level includes a close collaboration with suppliers, especially when all systems are outsources. All the aspects of suppliers' selection
and management are a part of this phase. When the company which is analyzed is more process-oriented, the difference between the second and
the third phase is less visible. At a level of the montage industry, amount of pressure can be focused on the suppliers to reduce the price.
Since the apparel industries' sources are from different places around the world, there is a probability to make this issue more important. On the
other hand, the textile art is more process-oriented and usually has a limit suppliers' number. More efforts should be done in a company to reduce
the price (e.g. waste reduction, redesigning the processes and the product design aspects).

5.

How the target costing becomes appropriate to the textile art?

The target costing is not an equal process to all companies that use it. In fact, a large part of the work focuses on the issue which is common
between all different processes. At the beginning there was the idea that the target costing is beneficial only for the montage industry, but with
some adjustments it became successful in other industries. Normally, the target costing was used for new products so it was used as a tool for the
companies with repeated product changes. But Shank and Fisher have shown that the target costing can be beneficial to the new products.
Product development process and the market orientation from the complete costing are two key elements of the target costing. The target costing
can prevent the problems by a market price introduction as a central point of analyzing:

Instead of documenting the historical data, it will be a management tool to achieve success in the product design.
An economical dependent variable can stimulate the product development process and these results in a profit-oriented market and
product development process.
Based on the market-oriented target costing, we can look for some long term strategies in the market. However the variable costing
and the activity-based costing are focusing on the short time targets.
Based in the specific targets, the target costing has the tendency to collect data related to the decision making, however the traditional
costing model is independent from the decision-making process and tries to document the total costs.

Intense competition and price market seems to be the key drivers of the target costing and they are usually defined for the textile art. Since the
market price sensitivity depends on the target market and the customer base, the competition in textile industries is increasing. The driver powers
"increase the worldwide competition". Transportation saves costs and in many cases it becomes more reliable. Transportations and data
exchange become better and faster than before. The global supply chain becomes an industrial standard and increases the number of the suppliers
so it increases the competition rate. However the international preventions or the world textile art made some challenges and some opportunities
in the industry. The market price is usually different in different markets. At the same time, some of the choice sources for components are
increasing inside and outside the company. The product's life cycle is decreasing not only in the textile and apparel industry but also in the rest
of the industries. The short fashion cycles have some advantages for the textile art and as a result, the product development process tries to
accommodate with them. So the target costing elements become a part of the apparel industry. Design for a specific target price is not a next
issue. For this reason, the total process should use the designing process issues like standard costing data, expected profit and prime cost for the
evaluation of the price in the textile art. This action doesn't lead to new processes and products.

6.

Conclusion

The target costing is really important in the textile and apparel industry. Usually the textiles and clothing in a sensitive market price increase the
importance of the products' pricing. The target costing prevents the product development through the costs which aren't in accordance to the
market demands. The target costing can be used successfully in the montage industry and production plans and therefore it's known as a practical
tool in the textile.

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