Incentives in New Product Development Projects and the Role of Target Costing

Jürgen Mihm

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Accounting and Organizational Management Capital Investment and Risk Analysis Product Development and Customization

Abstract

This paper investigates how self-optimizing engineers affect new product development (NPD) project outcomes and development times. A variety of widely used NPD project management approaches, including heavyweight project management, may allow or even encourage engineers to introduce late design changes and exhibit weak cost compliance, reducing the product's profit or competitiveness. Providing specifically designed incentives for individuals can eliminate such encouragement, and thus improve cost compliance and project timeliness. This paper discusses several practical incentive schemes, including profit-sharing contracts and component-level target costing. For many industrial projects, component-level target costing makes the most efficient use of available information to optimize project outcomes and reduce development times.

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References

1987Aggregation and Linearity in the Provision of Intertemporal Incentives 2002The Theory of Incentives 2001Having trouble with your strategy? Then map it.2001Contracting theory and accounting 2004Objectivity in the Eye of the Beholder: Divergent Perceptions of Bias in Self Versus Others.1998Venture capital financing, moral hazard, and learning 2005Incentives Between Firms (and Within)1999Managing the Process of Engineering Change Orders: The Case of the Climate Control System in Automobile Development

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