Target Cost Management in Agriculture: A TCM Review

Introduction to TCM in Agriculture

According to an interview conducted by Louise Ross for the Journal of Financial Management with a senior lecturer in accounting, there is an untapped potential for individuals within the food industry to adopt target cost management (TCM) to maximize organizational profitability. The food industry has one of the slimmest profit margins of all modern enterprises. Profits depend on high-volume sales, and producers must hope that there is no threat from high oil prices, political instability, or poor growing conditions in order to thrive. "The industry is inherently volatile: weather, disease or accident can destroy a crop or a herd and macro factors such as agricultural policy, tariffs and subsidies also influence commodity prices" (Ross 2008, p. 43).

The lecturer suggests that while many successful producers are already using "an intuitive form of target cost management (TCM), working backwards from assumed market prices," and that their "contracts between producers and various corporate partners (processors, distributors or retailers) are based on cost targets," a more formal TCM approach could behoove agricultural producers (Ross 2008, p. 42).

Defining Target Cost Management

The article, which takes the form of an interview, sets forth the notion that TCM need not be confined to traditional forms of manufacturing. The lecturer defines TCM as a process whereby "users establish what the market will pay, then factor in what profit they need in the long-term to arrive at the target cost. Then they examine their processes to see whether that target is achievable. Once committed to a project, they continually monitor and re-engineer processes to reduce costs" (Ross 2008, p. 42). Creating leaner processes is the core of TCM. By its very nature, agriculture is dependent upon financial benchmarking in relation to changing circumstances.

Challenges of Applying TCM to Farming

The difficulty of predicting future conditions of soil and weather limits farmers' ability to establish a clear figure as to what price the market will support while still covering input costs. This is why the lecturer admits "to be fair" there are considerable differences between the highly structured Japanese factories where TCM was first implemented and modern farming, although the need for re-engineering in relation to change remains an essential component of TCM's applicability (Ross 2008, p. 42).

TCM can be problematic when "prices are imposed by powerful customers," such as the government, or by powerful exterior market forces such as the weather (Ross 2008, p. 42). It can also be less accurate "where products are complex, possibly including components that are themselves subject to TCM" and other independent market forces (Ross 2008, p. 42). While agricultural products may seem simple on their surface, the components involved in their processing — from the development of seeds to the shipping of the final product — are highly complex. The prices of processed raw agricultural products depend upon the cost management techniques used in every component of the supply chain. As the lecturer notes, "the nature of crop and livestock life-cycles means there are fewer and more significant opportunities to intervene, as opposed to the continual tinkering that can occur in a factory" (Ross 2008, p. 42).

Works Cited

Ross, L. (2008, October). Target cost management. Financial Management, 42–43. Retrieved July 4, 2009, from ABI/INFORM Global.