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Gaiser, B. 1997. German cost management systems (Part 2). Journal of Cost Management (November/December): 41-45.

Summary by Christin Howells
Master of Accountancy Program
University of South Florida, Fall 2004

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The purpose of this paper is to explore German target costing1. Gaiser describes German engineering’s need for target costing and the requirements for the implementation of such an accounting practice as well as the differences between the German and Japanese methods.

Problems in German Research and Development

Gaiser notes two significant problems associated with German product development and thus German research and development. The first problem is that German companies have refrained from entering new markets because of “risk aversion, far-sightedness, and political barriers”. The second problem is a loss of market share as a result a failure to meet the needs and desires of customers. Though they have traditionally maintained a focus on technology, quality and functionality, the availability of such product characteristics is so widespread that customers are finding German products to be too costly.

The Concept of Target Costing

Target costing is similar to traditional costing in that it involves the same components: product cost, profit, and final price. The difference is that target costing focuses on the price the customer is willing to pay, determines an acceptable profit margin, and works backwards to determine a suitable product cost. In spending on product development and production costs, the company spends more on those features that are more valued by the customer. Gaiser notes that this method is market oriented as it is driven by the demands of the customer and the price they are willing to pay.

Target Costing Steps for Product Development

The first three steps are considered to be the Target Determination stages in which the company focuses on what the customer wants and how much they are willing to pay for such features. The fourth stage is the Target Realization stage. These steps are as follows:

1. “Determine market data, target profit, and target product cost.”

2. “Assign target cost to product functions and components according to customer value.”

3. “Authorize target costs.”

4. “Design the product according to the targets and simultaneously support product development through quick cost estimates and effective reporting systems.”

German Target Costing

There are several differences between German target costing and Japanese target costing. The most significant is the combination of the Japanese target costing approach with traditional activity based costing. This method is more applicable in the service industries and allows the company to reduce the indirect costs incurred during the product development stage. Though this method is not widely used it has been quite beneficial to those trying to sustain profit leadership.

The second difference is that German companies place emphasis on the Target Determination stage while the Japanese focus on the Target Realization stage and thus cost reduction. The Target Determination stage is important to German companies as it aids them in determining customer demands for functionality, quality, and cost. It has also been stated by benchmark studies that this type of focus is beneficial for those companies who are at a significant competitive disadvantage, as the Germans have been.

The final difference is the ability to provide cost information during the design stages in a timely manner. The Japanese have obtained this ability through the use of cost tables. These tables contain recorded cost data and allow the calculation of production costs, given any number of variables. Though some German companies are implementing such costing technologies, a significant number are unable to supply their product engineers and product development teams with any type of product cost projections in a timely manner.

Implementation of German Target Costing

As German target costing utilizes the integration of Japanese target costing and activity based costing, the process can become quite complex when numerous indirect costs are involved. Therefore, this costing method is the most beneficial and cost efficient when the product incurs a limited number of indirect costs. Also, as is the case with any company or system change, it must be supported and used by management and allow cross-functional participation. Finally, the company must encourage learning and product/system innovation for maximum effectiveness.


1 See Gaiser, B. 1997. German cost management systems. Journal of Cost Management (September/October): 35-41. (Summary).

Other related summaries:

Keys, D. E. and A. van der Merwe. 1999. German vs. U.S. cost management. Management Accounting Quarterly (Fall): 19-26. (Summary).

Keys, D. E. and A. van der Merwe. 2002. Gaining effective organizational control with RCA. Strategic Finance (May): 41-47. (Summary).

Sharman, P. A. 2003. Bring on German cost accounting. Strategic Finance (December): 30-38. (Summary).

Van der Merwe, A. and D. E. Keys. 2002. The case for resource consumption accounting. Strategic Finance (April): 31-36. (Summary).