Individual
Learning Project 2 Answer
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Target Costing
Institution Affiliation
Date
Introduction
Administration is a
critical stride in ensuring that a business is fruitful. This is important with
regards to retail selling and this makes it essential to have clear
administration approaches to oversee the general operations of the
organization. For Best Buy, it is recognizable that different people that are
involved already applied good management, a policy for the company to get the
current success that it is has. However, there is still room for improvement as
much more could be archived by using target costing as their management
technique. This is important for the overall achievement of the company to be
archived.
Rationale
for Selecting Target Costing
The rationale behind
target costing is that it will help the company to maximize its profits
depending on different customers they are serving. The company has operations
mainly in Mexico, America and Canada. In these markets, there is the
possibility of the company increasing their sales on several products but this
can only be archived through a different management technique. The most
suitable that has not been taken advantage of in this case is target costing.
The first scenario
that makes target costing suitable in this case is that there is a huge
difference in the customers that are served. The customers to the company’s
stores vary from individuals to construction firms as well as cooperate and
large scale buyers. All these people have different abilities when it comes to
making the purchases. However, it is noticeable that the company simply sells
to all of them at the same price and also has no differentiation for their
products. They sell these products at the same price not considering who is
buying and this is a gap the company should capitalize on so as to make sure
that they are able to increase the satisfaction that the customers get in the
long term from making purchases of goods from their stores.
By helping provide
products that have different purposes unlike the generalized ones, the company
can be able to target specific customers for the different needs that they
have. To start with, the individual customers often have a tendency to purchase
home electronics that they use for family or personal use (Blocher, Stout,
Juras and Cokins, 2015). This is something that leads them make more purchases
if they are able to get goods that suite them more. It is also recognizable
that the different customers like the corporate customers would be able to make
more purchases if they can get goods that are specifically made for them and
their needs.
The second aspect
that makes the use of target costing to be rational is that of making sure that
the exact product is delivered. Competition in the retail market is currently
very high. This is as a consequence of the distinctive retailers that have come
up and they are putting forth the same goods that are offered by Best Buy. So
by focusing on the product served suing this method it is possible to
accomplish several things. The first of this is that the company will be able
to differentiate the customers depending on their different financial ability.
This is because some customers are able to purchase expensive products while
others prefer purchasing low income goods.
This means the
company will be able to effectively budget for the cost that they are willing
to incur in making sure that the different goods are produced. They can be able
to effectively purchase goods at a certain price while clearly knowing the
profit margin that they will put in place will be able to compensate for the
different expenses. This generally increases the customer satisfaction while at
the same time making sure that the company benefits financially.
In-Depth Analysis of Target
Costing
Target costing is a management method that is largely used in
companies that produce and sale goods to the public. This is a method of
management that focuses on knowing the market and the product in an effort to
make sure that the seller presents a good that is favorable to different
consumers. It is basically defined as the process of identifying a product with
specific quality and performance to be produced at a certain cost and sold
within a predetermined period for the seller to be able to make a profit. This is a method that is used by many
manufactures and has proved to be beneficial.
It is notable that the process of target costing happens in two
main ways. The first of this is that the process can be done through market
driven process. Through this process, it is notable that the company first has
to focus on the markets that they are serving. Through this process the company
has to focus on analyzing the market that they serve. This means that they
should be able to identify the different segments that they serve at any one
time so as to make sure that they know who they are selling to (Hicks, 2010).
The initial step for the organization is to ensure that they can
set up objectives for the long term sales and profits that they can have the capacity
to work towards accomplishing in the long term. This is important as it helps
make sure that the company can be able to have goals that the management is
aiming at achieving. These goals are the same ones that can be broken down to
smaller goals for the individual employees to be able to achieve in both short
term and the long term. All this gives the company a sense of direction as they
work toward achieving the goals set.
The following stride through the target costing requires the
organization to have the capacity to build up a good blend of items. This is
imperative to ensure that the organization can have the capacity to create
items that address the issues of the clients and also meet the cost focuses on
the organization needs. This is a process that will be largely done by the
engineers so that they can be able to make sure that the performance of an
items meets the needs of a customer while at the same time, the items
components does not cost the company more than they would have anticipated. The
next step calls for the identification of the target selling price. This is a
large task as it calls for the different products to be specifically assessed
and their individual process identified. This is basic as it ensures that the
organization can have the capacity to set costs that commodities will be sold
at while at the same time the allowable cost of production for each item. This
helps guide the company in the production process to make sure that they do not
incur more expenses than they would have expected.
Product level target costing is also effective in making sure that
different people that are involved are able to get goods that are suitable for
them. This is done with focus on different items that are produced from one
time to another. The main goal is to provide the desired goods at a reasonable
cost to both the buyer and the seller. This is a method that helps make sure
the goods are priced depending on the financial ability of the different people
that are involved. This goes a long way in making sure that the seller gets
their expected revenue and profits while the buyers get goods at prices that
are competitive and attractive to them. this leads to more customer
satisfaction.
Target Costing
Implementation Process
Target costing
should begin with conducting the market research. Often the places where the
company operates are very wide and geographically separated. This means that
the people that are involved in the running of the companies operation need to
identify the specific markets that they operate in and the people that they
sell to. Considering the company already has operations in three countries, it
is expected that the market conditions in these places may differ and this
makes it necessary to have a clear picture of the different markets that will
be sold to (Fischer, 2006). This helps the company to know the specific target
market that will be able to benefit from the sale of the different items that
are identified in the company. It also helps the company to be able to know the
different financial abilities of their markets for them to be able to
effectively set prices that are good for the customers. It additionally helps
them to screen their own costs when planning the items in the assembling
procedure.
The target costing needs to be implemented in phases for it to be
successful. Once the company management has come to an agreement on the
different items that they can be able to sell using this management method, the
next step is for them to be able to create long term goals. This is a process
that is done by creating targets that the company should aim to achieve. Best
buy should set up goals that they can work towards achieving in terms of both
the revenue collection as well as the profits. They should be in the long term but
should have several periods for them to be able to monitor their progress as
time goes by. This should be the ultimate determinant of whether the management
concept was successful or not after it has been implemented.
The third step is for the organization to have the capacity to
write down an unmistakable rundown of the items that they will offer utilizing
this technique. This is important because not all the products that the company
sells may be applicable to be sold using this method. This is especially true
for all the different goods that the company sells and they do not manufacture.
Some of the technology items need to be sold at the retail prices that have
been set by the different manufactures. By coming up with a mix of the products
that will be sold under this process, the company can plan on where to sell
them in their network of branches as well as the cost they should incur in
selling them.
Identifying the target selling price can then be done at this
stage. This is because the company will already have a good clear picture on
the market that will be targeted as well as the goods that will be sold. The
company will also have developed long term goals to be archived and with these
three items, the company can be able to effectively tell the selling price that
they should set for the goods. This is because they will be able to calculate
this with the consideration of all the different variables that are company
needs for them to set a price that will be based on target costing.
This should lastly be followed by making sure that there is
accurate calculation of the profit margin for each individual product. The
company must have it clear on the specific profit that they will be getting
from the different products that they will stock in the stores. This will help
them to be able to identify the goods that will be able to make the most profit
for the company as they may be faster moving when compared to the other goods.
Lastly, the allowable cost of production for these products should be identified
so as to make sure that the company never goes above that because it would lead
to losses.
Target Costing Application
by Other Organizations
Since the
interception of the theory, the use of target costing has been done all around
the world. The process has also had a huge acceptance among the different
companies in the American business sector. Among the companies that have been
successful with this strategy is Starbucks. Today, Starbucks is among the
world’s largest retailers of coffee and other items and the company has grown
from its American origins to become a global dealer. The company has operations
in all the continents in the world and is today publicly traded in the Newyork
stock exchange.
This success however has been largely as a result of the different
measure the management has taken in an effort to facilitate the expansion of
the company. The first thing one can note from this is that operating a food
related shop across the world may not be successful if there is no variation.
This is because different cultures have different likes and dislikes and this
is very true for the foods that are served. Using target costing the company
has been able to come up with strategies that have lead to its current success.
Through target costing, the company offers a varies of products that are
different from the other depending on the market location. This is a strategy
that is done to make sure the preference of the market is taken into
consideration. Second, they price their products competitively. Considering
that the purchasing power of people differs, the company makes sure that the
products are priced depending on the specific market. This follows that the
cost of production has to be done in relation to the specific country so as to
make sure that the company is able to make a profit from each of its branches.
A second example of a company that has been successful in the
implementation of target costing is the Ford Motor Company. Best Buy is a multinational
that manufactures and sells vehicles. The process has not been easy though but
the implementation of target costing has enabled the company to be able to make
huge profits through the sale of motor vehicles and all the associate motor
vehicle parts. This is due to the identification of the markets they serve and
their needs and then followed by the designing of products that suite them at a
reasonable cost (Ansari,
2010). The company produces and sells cars from small personals cars to
a wider range of commercial vehicles. However before the production, the
company first identifies the target market to make sure that it has a clear
picture of the people who are intended to make purchases of the product. The
design of the product is then done. This differs and it may be commercial
purposes or for personal use. The identification of the need determines the way
the engineers will be able to design the vehicle to be able to meet the needs
of the customers.
The designing and the production however is done with the
consideration of the many markets where the car will be sold. More
specifically, the cost incurred has to be directly associated with the place
where the cars will be sold. This means that the company uses materials and
labor with consideration of the final production cost so as to make sure they
are able to sell the product at a profit. This is the same case for personal
cars or commercial vehicles like buses and trucks. This is also seen in the way
the company has been able to relocate its production plants to different places
around the world to take advantage of variables like lower labor costs compared
to the same in the American plants.
Target Costing Applicability to Best Buy
Several things
are clear indications that this method is very applicable when it comes to the
use in the Best Buy Company. The first item to consider is that the company has
operations in more than one market. The company’s operations spurn more than
three counties and this means that there must be a different in the purchasing
power that the different people will have in the long term. The fact that there
are different consumers with different capabilities simply means that there is
need to provide them with goods that are differently priced for the different
stores that are in operation (Kaplan and
Atkinson, 2015). This is a method that could prove to be very successful
in increasing the sales of the consumer electronics. This also helps the
different customers to be more satisfied in terms of the prices that they will
be buying their products with in both the long term and the short-term.
Second, target
costing is applicable because if the range of goods that the store sales. The
stores sell consumer electronics of all types but the most important thing is
that there are those that are from other manufactures while there are those
that the store has exclusive rights. This means that they cannot be sold in any
other store apart from the Best Buy stores. Taking this into consideration, it
may be hard to apply target costing on goods that are manufactured by other manufactures
simply because the company does not have the control over the production cost
of the item. These may remain the same just as they were sold before. The
product line that they have control over however could be used to provide range
of goods that can be produced with the thought of target costing. This means
some can be produced with some variables and not all the same so as to make
sure the other variables like cost are considered so as to increase the sales.
By providing the buyers goods that are customer made for the in the performance
and cost measures will make them to want to make more purchases hence
benefiting the company in the long term.
The third motivation behind why this technique is relevant for
this organization is that the organization has an extensive variety of makes to
choose from. Considering that they do not make most of the goods they sell,
they have a huge portfolio of manufactures they can choose from depending on
the needs of the consumer. By utilizing this, they can make sure they take the
products that are most suitable for the customers as well as the once that they
are able to calculate the cost of purchasing and moving to their stores to be
relatively low (Chapman, Hopwood, and Shields, 2007).
This is very important in the long term as it makes sure that the company
satisfies the needs of their consumers when necessary. Another reason why
target costing is applicable to Best Buy is that the company has a management
philosophy that can easily implement the whole process. It is notable that
among the reasons that the company has been able to have the success it has had
is that it has had able management all through. This is the type of manager
that are available on all levels and this makes the process to be easier to absorb.
The company has also been customer centered in most of its operations. By
implementing this, the management will simply be going for a better way of
making sure that the well being of the customer is always taken into
consideration in the goods that they sell.
It is also recognizable that the well being of the company in
future could be well supplemented by this. It is notable that with the
continued increase in competition, it is important to make sure that the
company is able to command customer loyalty. This can be done effectively by
making sure that target costing is done so as to have the many different
customers specific needs met while at the same time benefiting the company
financially.
Plan for Implementation in Best Buy
In an effort to implement this plan in Best Buy, the first step
should be the company management to be able to come up with clear long term
goals that will be worked towards achieving. This is important as it increases
the focus of the other employees as well as the company as a whole to know the
specific objectives that they will be working towards achieving. The second
step calls for the company to do a good market analysis (Woods, Taylor and Fang, 2012). This is especially important in
the case of Best Buy considering the company has operation in more than one
country. This will mean that the company should be able to identify the many
different people that it makes sales to as well as the potential customers in
the market currently.
The third step calls for the management along with the product
engineering to be able to come together and design products that meet the
profile of the needs of their market. This is an important aspect that helps
make sure that the goods that are produced are sold in the best manner
possible. The company can then seek to establish the profit margin that they
will apply on the different goods for them to be able to make a reasonable
profit. The cost limit can then be set with this consideration so as to make
sure that the final cost of the product is established. The period between
which the goods will be sold at this rate should be established to make sure
that the implementation is prompt.
The last stride is to ensure that the new prices are constantly
monitored so as to make changes when ever need be. This makes sure that the
continues sales are monitored and the trends across the different markets taken
so as to be able to make sure everything goes as planned in the long term for
the company. All in all targets costing will go a long way in assuring the
future success of the company in the ever changing retail market competition. It
will help command customer loyalty and increase sales in the long term.
References
Ansari,
S. L. (2010). Target costing:
The next frontier in strategic cost management ; [a CAM- I/CMS model for profit planning and cost management].
LaVergne, Tenn: Mountain Valley Publ.
Blocher E., Stout D., Juras P., and Cokins G. (2015). Cost Management: A Strategic Emphasis. 7th
Edition.
Chapman, C. S., Hopwood, A. G.,
& Shields, M. D. (2007). Handbook of management accounting research: [Volume 2]. Amsterdam: Elsevier.
Fischer, M. (2006). Determination of critical success factors
for the development of biotechnolgy clusters.
Münich: Grin Verlag.
Hicks, M.
(2010). Accounting for decision making: A study guide. Raleigh, NC:
Synergistics.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting.
PHI Learning.
Woods, M., Taylor, L., & Fang, G. C. G.
(2012). Electronics: A case study of economic value added in target costing. Management
Accounting Research,23(4), 261-277.
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