Accounting for preference dependency in target costing – a note

Carsten Homburg, André Hoppe, Roman Schick () and Amelie Braul
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Carsten Homburg: University of Cologne
André Hoppe: University of Cologne
Roman Schick: University of Cologne
Amelie Braul: University of Cologne

Review of Quantitative Finance and Accounting, 2021, vol. 57, issue 3, No 2, 845-858

Abstract: Abstract Target costing is a well-established strategic cost management tool in theory and practice. The original target costing model implies independence of customer preferences resulting in additive utility functions for the customer-oriented optimization of cost structures. We argue that this independence of preferences is not given until a minimum variant of a product is reached that provides its inherent functionality. This is reasonable since one cannot assign customer utility to a product that does not function in its most basic way. Our modified model accounts for the dependency of customer preferences and differentiates between the costs necessary to produce a minimum variant and those related to product features beyond this minimum variant. The customer-oriented optimization of the cost structure is then conducted only for those costs that exceed the costs of the minimum variant. This modification justifies the preference independence assumption in target costing and allows for a more reasonable assignment of required adjustments in costs per product component.

Keywords: Target costing; Customer preference independence; Minimum variant; Cost allocation; C02; M10; M41 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11156-021-00962-9

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