Yilin Zhan
ACC 350
Wed Class: Due 4/15/15

Using Target Costing to improve profitability
Target costing is a method of minimizing risk of failure and maximizing profitability. In the 1990s, a lot of American companies started to use target costing to improve their competitive in the market. Target Costing enables product- development teams to determine the right cost for achieving the required profit from a product. Its objective is to ensure that future products generate sufficient profits to enable the firm to achieve its long-term profit plans. I found two companies using target costing and achieving a great success: Culp Inc and ITT Automotive. The experience of both Culp Inc and ITT Automotive are used as two examples of successful implementation of target costing.
Culp Inc, a US textile manufacturer for the home furnishings industry, developed and began a target costing system in 1994. They realized the need for better-cost management and the new target costing system allowed them to “separate their financial and managerial accounting divisions so that they could better serve their customers” (Target Cost WBS). The new target costing system helped Culp Inc to generate an accurate cost system so that they could create an accurate target cost for their product. Therefore, they have understanding better in their supply chain and better communication with their partners. They dropped some their product line but led to an increase in productivity in their manufacturing divisions. The practice of Culp benefit a lot to the company. It also helped cost management team to make a good business decision and gather a wealth of information about the company and its operating conditions.
At ITT automotive, one of the world’s largest suppliers of auto parts, has decided to adopt the target costing system in the brakes area, and it created an excellent model that other areas of the company are beginning to emulate. “The first step is to determine the price that the company generally will quote is a price that already has been set by market conditions. Then An analysis is performed to determine if the product fits ITT Automotive's strategic goals and if the volume can be produced. (TargetCost Schmelze)” The professional team needs to make sure that the target price is feasible and profitable throughout years. In this case, they don’t need to adjust their target costing many times. The cost targeting team will try to find ways to reduce costs in order to accept a bid without cutting