CIMA P2 Syllabus A. Managing The Costs Of Creating Value - Target Costing in Service Industries - Notes ^{2 / 7}

Target costing was introduced by major Japanese manufacturing companies for use when:

1. a new product was to be designed to meet the target cost

2. a substantial part of the production cost consisted of bought-in materials

Four key characteristics of service organisations are: -

• Simultaneity/spontaneity (production and consumption of the service coinciding);

• Perishability (the inability to store the service);

• Heterogeneity (variability in the standard of performance of the provision of the service);

• Intangibility (of what is provided to and valued by individual customers).

• No transfer of ownership.

Hence, although target costing can be used in service industries, it may face a number of problems: -

1. it is very difficult to determine a market-driven price for services provided

2. the introduction of new services occurs far less frequently than in a manufacturing company.

3. the major cost in the service industry is salaries. Bought-in materials are usually low when compared to salaries. It is very difficult to reduce the cost of salaries!