1. What practical difficulties might arise from determining the target cost using EVA(TM) target costing?
2. Does the use of conventional (non-EVA(TM)) target costing mean that the cost of capital is ignored?

Taylor, Woods and Cheng Ge Fang (2014) reported on how one UK company moved its target costing system away from profit targets and focused it on product-level economic value added (EVA^(TM)) targets. The company, which used the pseudonym Electronics for confidentiality purposes, had been using target costing since the 1990s. Electronics deducted a target EVA^(TM) instead of a target profit from the selling price to determine a target cost, thus ensuring that the cost of capital is considered in cost-savings programmes. The incorporation of EVA^(TM) -based targets into target costing may require a larger reduction in product cost than required under traditional accounting-based profit metrics.
At Electronics the reduction needed to meet EVA^(TM) targets was 46 percent. The expected selling price under EVA^(TM) target costing did not change and was still determined by customer value so the change did not affect the firm’s focus on customers. Closing the gap between current and target cost involves evaluating the impact of reducing and substituting product components as well as changing assembly methods. The use of EVA^(TM) extended the range of cost-reduction opportunities to include capital costs. Alternatives that required more capital were evaluated carefully in order to assess their impact on EVA^(TM). At Electronics, EVA^(TM) -based measures changed how people behaved by, for example, motivating engineers to seek ways of reducing the capital base, since such savings enabled the target EVA^(TM) to be achieved. Thus, more attention was focused on capital costs.