Application at C Co
Difficulties in implementation
– C Co is a service company and in service companies, it is often more difficult to find a precise definition for some of the services. In order for target costing to be useful, it is necessary to define the service being provided. C Co actually provides a range of services to clients including specialist care wards at hospitals. This means that the definition of the services being provided will vary. Different target costs will need to be derived for the different services provided.
– C Co has two types of clients: regular clients and one-off clients. Since the service for regular clients is being repeated, it should be relatively easy to set a target cost for these jobs. However, for the one-off jobs, there may not be any comparative data available and therefore setting the target cost will be difficult.
– Similarly, some of the work available is very specialist. For example, cleaning restaurants and kitchens after an outbreak of food poisoning will require specialist techniques and adherence to a set of regulations with which C Co may not be familiar. It may be difficult to establish the market price for a service like this, thus making it difficult to derive a target cost.
Benefits to C Co
– Target costing is useful in competitive markets where a company is not dominant in the market and therefore has to accept a market price for their products. C Co is operating in a competitive market and whilst the service offered by
C Co is more specialist, it is clear from the recent drop in sales that price increases do lead to loss of customers. C Co cannot therefore ignore the market price for cleaning services and simply pass on cost increases as it has done. Target costing would therefore help C Co to focus on the market price of similar services provided by competitors, where this information is available.
– If after calculating a target cost C Co finds that a cost gap exists, it will then be forced to examine its internal processes and costs more closely. It should establish why the prices of the products it uses have increased in the first place.
If it cannot achieve any reduction in these prices, it should consider whether it can source cheaper non-chemical products from alternative suppliers. So, target costing will benefit C Co by helping it to focus on cost reduction and consequently customer retention.
Note: More points could be made and would earn marks.
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