Extending target costing to include targets for R&D costs and production investments for a modular product portfolio — A case study

This paper presents empirical evidence from a three-year case study of target costing as a cost-management method, applied to a portfolio of products based on a modular product strategy. A review of research directed at target costing shows that target costing customarily focuses mainly on the variable manufacturing costs of new products (e.g., material and labor costs) and typically neglects targets for other costs, such as those for product development. Furthermore, target costing conventionally focuses on individual product development, disregarding cost interdependencies between products. We present an approach for extending the scope of traditional target costing. The proposed method (1) incorporates targets for cost elements that traditional target costing ignores (e.g., R&D) and (2) describes a partially coordinated approach that enables managing the costs of a portfolio of products, thereby extending the single-project approach of traditional target costing. A three-year case study at a car company resulted in empirical evidence for the applicability of the proposed cost-management method and offers a qualitative account of its effects on the product development process.