Target Costing
What is Target Costing as a concept?
Target costing is a proactive, market-driven cost management approach. It starts with the price customers are willing to pay, based on market conditions and customer expectations. From this price, a desired profit margin is deducted to determine the maximum allowable cost. This cost target then guides decisions in product design, sourcing, and production to ensure profitability.
Explain the sequence in determining the target cost
The process begins with the market price, which reflects what customers are willing to pay under competitive market conditions. From this, management defines a target price for the specific product, taking into account positioning and expected sales volume.
Next, a target profit is set, and when this is deducted from the target price, the result is the allowable cost. The allowable cost represents the maximum cost level the product can have if the desired profit is to be achieved.
Internally, the company then estimates the drifting cost, which is the expected cost level based on current designs, technologies, and work practices without active cost management. The difference between the drifting cost and the allowable cost is the cost gap. This gap indicates how much costs must be reduced.
Through redesign, process improvements, and supplier involvement, the firm seeks to close the cost gap. The cost level that the organisation aims to achieve after these efforts is the target cost, which ideally equals the allowable cost and ensures that the target profit can be realised.
What are the advantages of Target Costing?
Advantages of Target Costing
Strong customer orientation: Costs are aligned with what customers actually value.
Early cost control: Most costs are managed during design, before they are locked in.
Prevents over-engineering: Focuses on “good enough” rather than “as good as possible.”
Cost reduction potential: Makes cost gaps visible and actionable.
Encourages innovation: Cost constraints push teams to find smarter design and process solutions.
Cross-functional coordination: Improves collaboration between engineering, marketing, accounting, and procurement.
Which of the cost types are related to (Cost of Conformity - Contribution to organization success) & or (Costs of deviation - Waste of resources)?
Error Prevention Costs = Cost of Conformity
Error prevention costs are intentional, proactive investments made to ensure products and processes meet quality standards from the outset. They directly support:
Stable processes
Fewer defects
Long-term efficiency
Because they reduce variation and failure, they clearly contribute to company success. Prevention costs exist by choice, not because something went wrong. They do not represent waste but rather value-creating investments.
Inspection (Appraisal) Costs = Cost of Conformity & Cost of Deviation
Inspection helps ensure that outputs meet specifications before reaching customers. Inspection Costs detects defects early, protects customers, and maintains reliability and reputation. In the short run, inspection is necessary to achieve acceptable quality.
However, inspection does not create quality — it only compensates for the risk of failure. If processes were perfectly designed, inspection would be unnecessary. Excessive inspection indicates weak prevention and inefficient processes. Therefore Inspection Costs are also related to Cost of Deviation.
Nonconformity (Failure) Costs = Cost of Deviation
Failure costs arise after quality has failed. They include rework, scrap, downtime, warranties, and liability. These costs do not create value and often damage customer trust. They are the clearest form of waste in the system. Failure costs do not support meeting standards — they arise precisely because standards were not met.
What is SPC and what are its requirements?
Statistical Process Control (SPC) – Core Idea
Statistical Process Control (SPC) is a quantitative quality management method used to monitor and maintain process stability over time. Its purpose is not to improve or redesign processes, but to ensure that an already acceptable process continues to perform as expected.
SPC distinguishes between normal variation (inherent in the process) and abnormal variation (signals that something has changed and may require action). SPC is therefore mainly a control and monitoring tool, not a creativity or improvement tool.
When SPC Can Be Used (Requirements)
SPC can only be applied when:
Quality is measurable and quantifiable (e.g. dimensions, weight, time, defect rate)
Reliable measurement systems and test equipment are available
The process is repetitive and stable enough to observe over time
What are some prerequisites or requirements of Target Costing?
The method encourages cross-functional collaboration between marketing, engineering, finance, and operations, supporting innovation while maintaining cost discipline. It helps firms remain competitive by avoiding late-stage cost cutting that can harm quality or customer satisfaction.
Also reliable data and data driven estimations on market prices, norms, risk and other strategic implications
Explain the Target Cost Index (TCI). What does it mean when the value is either (>1, <1)
The Target Cost Index (TCI) is used to control whether a product’s current cost structure matches customer value. It compares how important a component is to customers with how much of the total cost it currently takes.
Target Cost Indexi = %Customer Value for Componenti%Drifting Costsi
TCI > 1: The component delivers more customer value than it currently costs. This may indicate that the company is underinvesting in that component, and more resources or technical enhancements could be justified.
TCI < 1: The component costs more than the value customers place on it. In this case, it may be overengineered or receiving more attention than necessary, making it a candidate for cost reduction or simplification.
What are the pitfalls of Target Costing?
Common Pitfalls / Challenges
Lack of understanding: If teams see target costing as simple cost cutting, it fails.
Uncertain assumptions: Sales volumes, customer preferences, and life-cycle forecasts are often wrong.
Overreliance on customer input: Customers may not know what they want in future markets.
Poor teamwork implementation: Target costing requires strong cross-functional cooperation.
Employee pressure and burnout: Tight cost targets can increase stress.
Long development times: Extensive analysis can slow time-to-market.
What is M7? Explain. This is though ahah. Lad os finde en video på YouTube
Imagine a factory that starts receiving increasing customer complaints about product quality, but no clear data explains why. Management turns to the M7 methods to structure the problem.
They begin with an Affinity Diagram, collecting observations from operators, engineers, and sales staff and grouping them into themes such as materials, machines, training, and suppliers. This helps define what the problem actually is. Next, a Relation Diagram is used to explore how these themes influence each other, revealing, for example, that poor training leads to machine misuse, which increases defects.
With the main drivers identified, a Tree Diagram breaks the problem into concrete sub-issues and possible actions, such as improving training, changing maintenance routines, or adjusting process standards. A Matrix Diagram then compares customer requirements with technical solutions to understand trade-offs—such as cost versus quality improvements.
Management then applies Portfolio Analysis to prioritize solutions based on impact and feasibility, deciding which actions deliver the greatest quality improvement with available resources. A Problem Decision Plan formalizes this choice by ranking solutions and selecting the most appropriate ones.
Finally, a Network Plan translates the chosen solution into an implementation sequence, specifying tasks, timing, and responsibilities so the improvement can be executed effectively.
In essence, the M7 methods guide managers from a vague quality problem to a structured, actionable solution when quantitative data is limited.
Describe various tools to detect and prevent fraud in organizations?
Levers of control (e.g. rules, monitoring, performance targets) shape behavior by constraining opportunities and aligning incentives, thereby reducing both pressure and opportunity for fraud.
Whistleblowing systems enable insiders to report misconduct anonymously, making hidden (dark-field) fraud visible and significantly increasing detection probability.
Personality and behavioral controls (profiling) focus on red flags such as resistance to task rotation, unusual lifestyle changes, or excessive control over processes; these signals support early detection but are not proof of fraud.
Benford’s Law is a statistical detection tool that identifies abnormal digit distributions in large numerical datasets; deviations from expected patterns flag transactions or accounts for further investigation rather than directly proving fraud.
What are some of the challenges of Target Costing?
Despite its advantages, target costing can be challenging. It relies on accurate market and cost information, which may be uncertain. Strict cost targets can create pressure on design teams, potentially leading to conflicts between cost, quality, and functionality. It also requires strong coordination across departments and may limit flexibility if market conditions change rapidly.
In summary: Target costing shifts cost management upstream, turning profit from a residual outcome into a planned objective, while embedding market orientation and cost control into product development.
What actual approaches are available for closing the cost gap?
Once cost gaps have been identified, this step focuses on actively reducing costs to bring actual costs in line with target costs. It translates analysis into concrete managerial and operational actions.
Benchmarking compares products, processes, and costs with industry leaders to identify best practices and improvement opportunities. It offers valuable external insights but is often limited by restricted access to detailed competitor data.
Value analysis examines whether each component delivers sufficient customer value, aiming for what is good enough rather than overengineering. This supports efficient cost reduction but must be managed carefully to avoid reducing value too far.
Design-to-cost integrates cost constraints into product design from the outset through cross-functional collaboration. This helps prevent cost overruns early, though it may restrict design flexibility or innovation.
Production process optimization focuses on reorganizing production, including outsourcing or insourcing decisions, to reduce costs and improve control. While it can generate significant savings, it often requires substantial investment and organizational change.
What are quality costs?
Quality costs represent the costs of achieving quality and the costs arising from quality failures. They are typically classified into prevention costs, inspection (appraisal) costs, and nonconformity (failure) costs, which together form costs of conformity and costs of deviation.
What is Q7. Også though. Video!!!
A factory produces wooden dining chairs, and customers increasingly complain that chairs become unstable and start wobbling after a short period of use.This time, there is data available from production records and quality reports, so they turn to the Q7 methods, which focus on measurement, visualization, and statistical analysis.
They start with a Failure Collection List, recording all defects reported from production and customers. The data shows several issues (scratches, loose screws, wobbling legs), but wobbling chairs appear most frequently. A Histogram shows that this defect is concentrated in certain production weeks.
A Pareto Diagram confirms that wobbling legs account for the majority of quality complaints, making it the main problem to address. A Quality Control Chart then tracks leg-alignment measurements over time and reveals that the process is unstable, with frequent deviations beyond control limits.
To understand why this happens, the team constructs an Ishikawa (Fishbone) Diagram with the effect “Wobbling chair.” Causes are grouped under Man (inconsistent tightening by operators), Machine (worn drilling equipment), Material(wood moisture variations), Method (assembly sequence), Measurement (imprecise alignment checks), and Environment (humidity affecting wood expansion).
A Correlation Diagram shows a clear relationship between humidity levels and defect rates, confirming environmental influence. Finally, Brainstorming leads to actions such as improved moisture control, standardized tightening procedures, and better inspection gauges.
What is fraud?
Fraud is intentional wrongdoing that causes material misstatements or misappropriation by distorting accounting information.
What is relative ranking & conjoint analysis?
Relative ranking is a simple method where customers rank features by importance. These rankings are averaged and converted into relative weights, showing how important each feature is compared to the others. This approach is easy to use and helps firms quickly decide which features should be prioritized when resources or costs are limited.
Conjoint analysis goes a step further by asking customers to choose between different combinations of features, such as price, quality, and functionality. Instead of asking directly what is important, it observes choices and estimates how much each feature influences decisions. This makes it possible to understand trade-offs, such as how much quality customers are willing to give up for a lower price.
How are the target cost & the standard cost related?
Target costing defines what the product should cost.
Standard costing defines what the product is expected to cost per unit in practice.
After closing the cost gap, the agreed target costs per component are summed up to form the standard cost per product.
What is Quality Management?
Quality management focuses on designing, controlling, and improving quality in products and processes. Its purpose is twofold: to ensure conformance quality, meaning that outputs meet defined standards and specifications, and to support value creation by aligning quality characteristics with customer expectations and strategic positioning
What is FMEA? Explain.
Se beskrivelse i noter haha. Den er lang
What is the bright-dark field model?
The bright–dark field model illustrates the fundamental detection problem in fraud.
The bright field represents detected and reported wrongdoing—fraud that is visible through audits, controls, or investigations.
The dark field captures undetected, hidden fraud. Because fraud is inherently concealed, observed cases systematically underestimate total wrongdoing, which is why estimation and judgment (“guessing”) are necessary.
Stronger controls initially expand the bright field by uncovering previously hidden fraud, which may paradoxically increase observed fraud in the short run. Over time, however, effective and sustained controls reduce the dark field itself by deterring and preventing fraud, lowering the true underlying level of wrongdoing.
Market-into-Company Approach
This approach sets target costs based on market conditions, such as customer willingness to pay and competitor prices. Its strength is strong market alignment and competitive pricing. However, it mainly fits existing markets and may limit innovation or entry into new markets.
Out-of-Standard-Costs Approach
Target costs are derived by applying a fixed reduction to existing standard costs. This is practical for incremental product improvements and easy to implement. The challenge is that it can lock in outdated or inefficient cost structures and reduce innovation.
Out-of-Company Approach
Here, target costs are based on the firm’s internal capabilities and efficiency levels. This makes it simple to apply using internal data. The risk is weak market responsiveness, which may lead to mispricing or misalignment with customer expectations.
What life-cycle considerations can be included in target costing?
Costs, sales prices, and volumes change over product life cycle
Time-value of money and changes in customer demands should be considered
Present value discounting accounts more accurately for true costs/sales
Especially important for long-life products and productions
Explain the different Quality Cost types and how they differ from each other in purpose and nature?
Error Prevention Costs (Before errors occur)
Error prevention costs are planned, proactive investments made to ensure that defects do not arise. They include activities such as quality planning, employee training, supplier evaluation, and quality system development. The purpose is to build quality into the design and process, reducing the likelihood of errors.
Inspection (Appraisal) Costs (Detecting errors)
Inspection costs arise from activities that identify defects before products reach the customer, such as incoming inspections, testing during production, final inspections, and quality documentation. These costs do not improve quality directly but act as a control mechanism to catch deviations from standards.
Nonconformity Costs (After errors occur)
Nonconformity costs occur when quality requirements are not met despite prevention and inspection efforts.
Internal failure costs occur before delivery and include rework, scrap, downtime, and repeated inspections.
External failure costs occur after delivery and include warranties, returns, liability claims, and loss of reputation.
These costs represent pure waste, as they consume resources without creating value.
What are the advantages and disadvantages of FMEA?
Advantages of FMEA
Avoids failures systematically before they occur by identifying risks early
Measures improvements through Risk Priority Number (RPN) comparisons over time
RPN can motivate employees by making risks visible and actionable
Secures knowledge transfer by documenting risks, causes, and countermeasures in the FMEA form
Challenges of FMEA
High implementation effort, requiring time, data, and cross-functional coordination
RPN is subjective in its determination, as O, S, and D scores rely on judgment
Clarity of the FMEA form can be limited, especially for complex systems and problems
What is the difference between fraud & fraud risk?
There is a clear distinction between fraud and fraud risk.
Fraud refers to actual, realized wrongdoing—concrete events that have occurred and can be investigated and sanctioned.
Fraud risk, in contrast, concerns the possibility of fraud and is managed proactively through systems of controls, rules, procedures, and managerial responsibilities.