Impact of Target Costing on New Product Development Strategy for SMES in Nigeria's Manufacturing Sector

Okoroafor Ikechukwu Kingsley; Aruomah Obinwanne Kenechukwu Ph.D; John Okey Onoh PhD

doi:10.56201/jafm.vol.12.no10.2026.p414.442

📄 Download Paper

Impact of Target Costing on New Product Development Strategy for SMES in Nigeria's Manufacturing Sector

Okoroafor Ikechukwu Kingsley, Aruomah Obinwanne Kenechukwu Ph.D, John Okey Onoh PhD

Abstract

Small and Medium Enterprises constitute over 96% of businesses and 84% of employment in Nigeria’s manufacturing sector and are critical to economic diversification and industrial growth (National Bureau of Statistics [NBS], 2024). Central to the survival and competitiveness of manufacturing SMEs is their ability to continuously develop new products that meet customer needs at profitable prices. However, Nigerian manufacturing SMEs operate in a challenging environment characterized by high production costs, unstable exchange rates, poor infrastructure, limited access to finance, and intense competition from imports (Ariyo, 2022). These conditions often lead to cost overruns, product failures, and low profitability during New Product Development . Traditional cost management approaches such as cost-plus pricing is ineffective in this context because they determine price after costs have been incurred (Horngren, Datar, & Rajan, 2022). Target Costing, a proactive, market-driven cost management technique that determines allowable cost as `Market Price to Desired Profit` and works backward during the design phase, offers a viable alternative (Cooper & Slagmulder, 1997). Despite its documented benefits in developed economies, there is limited empirical evidence on the adoption and impact of target costing on NPD strategy among manufacturing SMEs in Nigeria. Anchored on Contingency Theory (Fisher, 1998) and Resource-Based View (Barney, 1991), this study examined the impact of target costing on NPD strategy and performance outcomes of manufacturing SMEs in Nigeria. Specifically, the study assessed the level of awareness and adoption of target costing, examined its impact on NPD strategy, identified implementation challenges, evaluated its effect JAFM JAFM JAFM on performance outcomes, and determined the future outlook for adoption. A descriptive survey research design was adopted. The population comprised 18,500 registered manufacturing SMEs in five major industrial hubs: Lagos, Ogun, Anambra, Kano, and Rivers States. Using the Taro Yamane (1967) formula, a sample size of 470 was determined and 412 usable questionnaires were retrieved, representing an 87.7% response rate. A multi-stage sampling technique was used. Primary data were collected using a structured 50-item questionnaire divided into six sections: Bio-Data, Awareness and Adoption, Impact on NPD, Implementation Challenges, Performance Outcomes, and Future Outlook. Sections B–F used a 5-point Likert scale. Data were analyzed using SPSS v26 through descriptive statistics, Pearson correlation, and multiple and hierarchical regression. The findings revealed that the level of target costing adoption among Nigerian manufacturing SMEs is moderate, with only 39.6% of firms confirming current use. Regression analysis showed that Target Costing Adoption has a positive and significant effect on NPD Strategy (β = 0.667, p < 0.001, R2 = 0.539). This implies that SMEs that adopt target costing are better able to align product features with customer willingness to pay, reduce cost overruns, encourage cross-functional teamwork, and achieve faster time-to-market. Similarly, Target Costing Adoption has a positive and significant effect on Performance Outcomes (β = 0.518, p < 0.001, R2 = 0.315), leading to improved profitability, cost control, product quality, market share, and return on investment. Furthermore, Implementation Challenges significantly moderate the relationship between target costing and NPD strategy (β = -0.118, p = 0.005). Key challenges identified include unstable raw material costs, foreign exchange volatility, poor access to market information, inadequate accounting software, and limited technical expertise. This finding supports Contingency Theory, which posits that the effectiveness of management practices depends on contextual fit. The study concludes that target costing is an effective tool for improving NPD strategy and performance of Nigerian manufacturing SMEs. However, its benefits are constrained by the prevailing business environment. Therefore, for target costing to deliver optimal results, SMEs must institutionalize it as part of NPD, while government and professional bodies must address structural and capacity challenges. The study contributes to theory by extending Contingency Theory and RBV to the Nigerian SME context and by providing empirical evidence on target costing in a developing economy. Practically, it recommends that SMEDAN and ICAN should develop simplified target costing toolkits and training programs for SMEs, while government should stabilize macroeconomic variables and improve market data availability. The study is limited by its cross-sectional design and focus on five states. Future research should adopt longitudinal designs and explore the role of technology in target costing adoption.

Keywords

Target CostingNew Product DevelopmentSMEsManufacturing SectorNigeriaPerformanceContingency Theory

References

Adebayo, A., & Nassar, M. L. (2013). Innovation and small business performance in Nigeria. European Journal of Business and Social Sciences, 2(2), 47-63. Adeleye, I. (2018). Institutional voids and SME strategy in Africa. Africa Journal of Management, 4(2), 139-156. https://doi.org/10.1080/23322373.2018.1464479 Adeniran, T. V., & Yusuf, B. (2019). Market information and SME performance in Nigeria. African Journal of Business Management, 13(8), 267-275. https://doi.org/10.5897/AJBM2018.8712 Adeyemi, S. B. (2011). The impact of management accounting practices on performance of SMEs in Nigeria. European Journal of Economics, Finance and Administrative Sciences, 38, 32- 44. Agyei-Mensah, B. K. (2016). Adoption and use of strategic management accounting practices in Ghana. Journal of Accounting in Emerging Economies, 6(2), 120-140. https://doi.org/10.1108/JAEE-02-2014-0011 Akinbode, S. O., & Ogunleye, K. O. (2018). Competitive strategies and performance of manufacturing SMEs in Nigeria. International Journal of Entrepreneurship and Small Business, 33(4), 521-538. Akinsanya, O. O. (2018). Strategic cost management practices and profitability of manufacturing companies in Nigeria. International Journal of Accounting Research, 6(2), 176. https://doi.org/10.35248/2472-114X.18.6.176 Ansari, S. L., Bell, J. E., & Swenson, D. W. (2012). Target costing: The next frontier in strategic cost management. McGraw-Hill. Ariyo, A. (2022). Economic diversification in Nigeria: Challenges and prospects. Centre for Economic and Social Research. Ayyagari, M., Beck, T., & Demirguc-Kunt, A. (2007). Small and medium enterprises across the globe. Small Business Economics, 29(4), 415-434. https://doi.org/10.1007/s11187-006- 9002-5 Babbie, E. (2016). The practice of social research (14th ed.). Cengage Learning. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120. https://doi.org/10.1177/014920639101700108 Baron, R. M., & Kenny, D. A. (1986). The moderator-mediator variable distinction in social psychological research. Journal of Personality and Social Psychology, 51(6), 1173-1182. Bhimani, A., & Pigott, D. (1992). Implementing target costing: A survey of UK firms. Management Accounting Research, 3(1), 51-67. Bryman, A. (2016). Social research methods (5th ed.). Oxford University Press. Chong, V. K. (2015). The impact of target costing on cost management and firm performance. Asian Review of Accounting, 23(3), 230-251. https://doi.org/10.1108/ARA-10-2014-0105 Cooper, R., & Slagmulder, R. (1997). Target costing and value engineering. Productivity Press. Crawford, M., & Di Benedetto, C. A. (2015). New products management (11th ed.). McGraw-Hill Education. Creswell, J. W., & Creswell, J. D. (2018). Research design: Qualitative, quantitative, and mixed methods approaches (5th ed.). Sage. Davila, T., & Wouters, M. (2004). Designing cost-competitive products through target costing. Journal of Management Accounting Research, 16(1), 1-26. https://doi.org/10.2308/jmar.2004.16.1.1 JAFM JAFM JAFM Dekker, H., & Smidt, P. (2003). A survey of the adoption and use of target costing in Dutch firms. International Journal of Production Economics, 84(3), 293-305. Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20(1), 65-91. Egbunike, F. C., & Okoro, G. E. (2017). Management accounting practices and performance of SMEs in Nigeria. International Journal of Academic Research in Accounting, Finance and Management Sciences, 7(3), 1-10. Ellram, L. M. (2006). The implementation of target costing in the United States: Theory versus practice. Journal of Supply Chain Management, 42(1), 13-26. https://doi.org/10.1111/j.1745-493X.2006.00002.x Eze, S. C., Chinedu-Eze, V. C., & Bello, A. O. (2018). The factors influencing the adoption of management accounting practices in Nigerian SMEs. Academy of Accounting and Financial Studies Journal, 22(2), 1-15. Feil, P., Yook, K. H., & Kim, I. W. (2004). Japanese target costing: A historical perspective. International Journal of Strategic Cost Management, 1(1), 10-19. Fisher, J. G. (1998). Contingency theory, management control systems and firm outcomes: Past results and future directions. Behavioral Research in Accounting, 10, 47-64. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Pitman. Gerdin, J., & Greve, J. (2004). Forms of contingency fit in management accounting research: A critical review. Accounting, Organizations and Society, 29(3-4), 303-326. https://doi.org/10.1016/S0361-3682(02)00053-3 Grant, R. M. (1991). The resource-based theory of competitive advantage: Implications for strategy formulation. California Management Review, 33(3), 114-135. Guilding, C., Cravens, K. S., & Tayles, M. (2000). An international comparison of strategic management accounting. Accounting, Organizations and Society, 25(2), 113-133. Hair, J. F., Hult, G. T., Ringle, C. M., & Sarstedt, M. (2017). A primer on partial least squares structural equation modeling (PLS-SEM) (2nd ed.). Sage. Helms, M. M., Ettkin, L. P., & Chapman, S. (2000). Supply chain forecasting: Collaborative forecasting supports supply chain management. Business Process Management Journal, 6(5), 392-407. https://doi.org/10.1108/14637150010352492 Horngren, C. T., Datar, S. M., & Rajan, M. V. (2022). Cost accounting: A managerial emphasis (17th ed.). Pearson. Hossain, M. (2013). Target costing and SMEs: Evidence from Ghana. Research Journal of Finance and Accounting, 4(13), 125-132. Ibusuki, U., & Kaminski, P. C. (2007). Product development process with focus on value engineering and target-costing: A case study in an automotive company. International Journal of Production Economics, 105(2), 459-474. https://doi.org/10.1016/j.ijpe.2006.04.009 Jabareen, Y. (2009). Building a conceptual framework: Philosophy, definitions, and procedure. International Journal of Qualitative Methods, 8(4), 49-62. https://doi.org/10.1177/160940690900800406 Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. Kajiwara, T. (1997). Target costing in the Japanese automobile industry. In Japanese Management Accounting (pp. 53-64). Springer. JAFM JAFM JAFM Kaplan, R. S., & Norton, D. P. (1996). The balanced scorecard: Translating strategy into action. Harvard Business Press. Kato, Y. (1993). Target costing support systems: Lessons from leading Japanese companies. Management Accounting Research, 4(1), 33-47. https://doi.org/10.1006/mare.1993.1003 Kotler, P., & Keller, K. L. (2016). Marketing management (15th ed.). Pearson. Kumar, V., & Chavan, M. (2015). Target costing implementation challenges in Indian SMEs. International Journal of Management and Business Research, 5(2), 89-98. Lawrence, P. R., & Lorsch, J. W. (1967). Organization and environment: Managing differentiation and integration. Harvard University Press. Monden, Y., & Hamada, K. (1991). Target costing and Kaizen costing in Japanese automobile companies. Journal of Management Accounting Research, 3, 16-34. Mutua, S. M., & Njeru, A. (2014). Effect of target costing on performance of manufacturing SMEs in Nairobi. International Journal of Social Sciences and Entrepreneurship, 1(11), 540-554. National Bureau of Statistics [NBS]. (2024). Nigerian gross domestic product report Q4 2023. https://nigerianstat.gov.ng Nunnally, J. C., & Bernstein, I. H. (1994). Psychometric theory (3rd ed.). McGraw-Hill. Nwude, E. C., & Okeke, C. (2018). Product innovation and performance of manufacturing SMEs in South East Nigeria. European Journal of Business and Management, 10(16), 45-53. Oduro, I. M., & Agyei, S. K. (2013). Cost management practices in SMEs: A comparative study of Ghana and Nigeria. African Journal of Accounting, Economics, Finance and Banking Research, 9(9), 1-14. Oghojafor, B. E., Olayemi, O. O., Okon, E. E., & Alaba, O. A. (2012). Strategic management of new product development in Nigerian SMEs. Journal of Management Strategy, 3(2), 18- 27. Ojeka, S. A., Iyoha, F. O., & Mukoro, D. O. (2014). International financial reporting standards adoption and cost of equity capital. Mediterranean Journal of Social Sciences, 5(16), 227. Okpara, J. O. (2011). Factors constraining the growth and survival of SMEs in Nigeria. Management Research Review, 34(2), 156-171. https://doi.org/10.1108/01409171111102786 Olatunji, T. E. (2019). Cost management practices and performance of SMEs in Nigeria. International Journal of Small Business and Entrepreneurship Research, 7(4), 1-12. Omoregie, N., & Osifo, O. (2016). Cost management techniques and performance of manufacturing firms in Nigeria. Journal of Finance and Accounting, 4(3), 112-120. https://doi.org/10.11648/j.jfa.20160403.14 Otley, D. T. (1980). The contingency approach to management accounting. Accounting, Organizations and Society, 5(4), 413-428. Pallant, J. (2020). SPSS survival manual (7th ed.). McGraw-Hill Education. Peteraf, M. A. (1993). The cornerstones of competitive advantage: A resource-based view. Strategic Management Journal, 14(3), 179-191. Podsakoff, P. M., MacKenzie, S. B., Lee, J. Y., & Podsakoff, N. P. (2003). Common method biases in behavioral research: A critical review of the literature and recommended remedies. Journal of Applied Psychology, 88(5), 879-903. https://doi.org/10.1037/0021- 9010.88.5.879 Rogers, E. M. (2003). Diffusion of innovations (5th ed.). Free Press. Saunders, M., Lewis, P., & Thornhill, A. (2019). Research methods for business students (8th ed.). Pearson. JAFM JAFM JAFM Small and Medium Enterprises Development Agency of Nigeria [SMEDAN]. (2021). National survey of micro, small and medium enterprises. SMEDAN. Small and Medium Enterprises Development Agency of Nigeria [SMEDAN] & National Bureau of Statistics [NBS]. (2017). National survey of micro, small and medium enterprises. SMEDAN. Small and Medium Enterprises Development Agency of Nigeria [SMEDAN]. (2017). National policy on MSMEs. SMEDAN. Swenson, D., Ansari, S., Bell, J., & Kim, I. W. (2003). Best practices in target costing. Management Accounting Quarterly, 4(2), 12-17. Tanaka, M. (1989). Cost planning and control systems in the design phase of a new product. In Japanese Management Accounting: A World Class Approach to Profit Management (pp. 49-71). Productivity Press. Tani, T. (1995). An empirical study of target cost management at Japanese companies. Management Accounting Research, 6(4), 297-314. https://doi.org/10.1006/mare.1995.1018 Taro Yamane. (1967). Statistics: An introductory analysis (2nd ed.). Harper and Row. Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509-533. Trott, P. (2017). Innovation management and new product development (6th ed.). Pearson. Udeh, S. N., & Ezejiofor, R. A. (2020). Strategic cost management and profitability of listed manufacturing firms in Nigeria. , 6(2), 45-56. van der Merwe, A., & Thomson, K. (2007). The use of strategic management accounting techniques by South African manufacturers. Meditari Accountancy Research, 15(2), 1-21. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171-180. World Bank. (2023). Nigeria development update: Seizing the opportunity to thrive. World Bank Group. https://www.worldbank.org Yoshikawa, T., Innes, J., & Mitchell, F. (1994). Cost management through target costing. In Japanese Management Accounting (pp. 159-173). Routledge. Questionnaire SECTION A: BIO DATA 1. Gender [ ] Male [ ] Female 2. Age [ ] 18-25 [ ] 26-35 [ ] 36-45 [ ] 46-55 [ ] 56 and above 3. Highest Educational Qualification [ ] SSCE/OND [ ] HND/B.Sc [ ] MBA/M.Sc [ ] PhD [ ] Professional Certificate 4. Position in the Company [ ] Owner/CEO [ ] Manager [ ] Accountant/Cost Controller [ ] Production/NPD Staff [ ] Other 5. Years of Operation of the SME [ ] 1-3 years [ ] 4-6 years [ ] 7-10 years [ ] 11-15 years [ ] Above 15 years 6. Number of Employees [ ] 1-10 [ ] 11-50 [ ] 51-100 [ ] 101-200 [ ] Above 200 7. Type of Manufacturing JAFM JAFM JAFM [ ] Food & Beverage [ ] Textile/Apparel [ ] Chemicals/Pharma [ ] Metal/Steel [ ] Other 8. Location of Firm [ ] South West [ ] South East [ ] South South [ ] North [ ] FCT/Abuja 9. Is Target Costing used in your firm? [ ] Yes [ ] No [ ] Not Sure [ ] Plan to adopt [ ] Used in the past 10. How often are new products developed in your firm? [ ] Monthly [ ] Quarterly [ ] Bi-Annually [ ] Annually [ ] Rarely SECTION B: AWARENESS AND ADOPTION OF TARGET COSTING Response Options: Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 11. Our management team fully understands the concept of target costing. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 12. Target costing is formally included in our new product development process. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 13. We set a target cost based on market price minus desired profit before design begins. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 14. Employees are trained on target costing techniques. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 15. Top management supports the use of target costing for new products. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree SECTION C: IMPACT OF TARGET COSTING ON NPD STRATEGY Response Options: Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 16. Target costing helps us to align new product features with customer willingness to pay. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 17. The use of target costing reduces cost overruns during product development. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 18. Target costing encourages cross-functional teamwork in NPD. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 19. Target costing leads to faster time-to-market for new products. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 20. Target costing improves our ability to achieve desired profit margins on new products. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 21. Target costing helps us to eliminate non-value adding activities in NPD. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 22. Target costing increases innovation because design teams must meet cost targets. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 23. Target costing improves communication between marketing, design and production. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 24. Target costing helps us select suppliers early in the NPD process. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 25. Target costing makes our new product pricing more competitive. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree SECTION D: CHALLENGES OF IMPLEMENTING TARGET COSTING IN SMES Response Options: Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree JAFM JAFM JAFM 26. Lack of technical expertise is a major barrier to using target costing. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 27. Unstable cost of raw materials in Nigeria makes target costing difficult. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 28. Poor access to market information limits our ability to set accurate target costs. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 29. Inadequate accounting software hinders target costing implementation. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 30. Resistance from staff slows down the adoption of target costing. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 31. High cost of implementing target costing discourages SMEs. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 32. Fluctuating exchange rates affect our target cost calculations. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 33. Lack of supplier cooperation makes it hard to achieve target costs. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 34. Government policies and taxation make target costing less effective. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 35. Limited capital makes it hard to invest in NPD under target costing. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree SECTION E: PERFORMANCE OUTCOMES OF TARGET COSTING Response Options: Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 36. Target costing has improved our firm’s profitability. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 37. Target costing has increased customer satisfaction with new products. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 38. Target costing has reduced product development costs. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 39. Target costing has improved our market share for new products. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 40. Target costing has improved the quality of new products. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 41. Target costing has helped us achieve better cost control. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 42. Target costing has reduced product failure rate in the market. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 43. Target costing has improved our competitive advantage. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 44. Target costing has increased return on investment for new products. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 45. Target costing has enhanced overall firm performance. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree SECTION F: FUTURE OUTLOOK Response Options: Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree JAFM JAFM JAFM 46. Target costing will become more important for Nigerian manufacturing SMEs in the next 5 years. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 47. Technology adoption will make target costing easier for SMEs in Nigeria. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 48. Government support is needed to promote target costing among SMEs. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 49. We plan to increase the use of target costing in our future NPD projects. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree 50. Target costing is key to the long-term survival of manufacturing SMEs in Nigeria. Strongly Agree | Agree | Neutral | Disagree | Strongly Disagree

Impact of Target Costing on New Product Development Strategy for SMES in Nigeria's Manufacturing Sector

Abstract

Keywords

References

More Articles from JOURNAL OF ACCOUNTING AND FINANCIAL MANAGEMENT