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Target Costing

Target costing is a pricing method where a firm sets a target cost for a product by subtracting the desired profit margin from the expected selling price. This target cost is the maximum amount that can be spent on production while still earning the required profit. The target cost is determined during product planning and design to guide cost reduction efforts throughout the entire lifecycle. Key steps involve defining the product, setting price and cost targets, achieving those targets, and maintaining competitive costs over time.

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135 views2 pages

Target Costing

Target costing is a pricing method where a firm sets a target cost for a product by subtracting the desired profit margin from the expected selling price. This target cost is the maximum amount that can be spent on production while still earning the required profit. The target cost is determined during product planning and design to guide cost reduction efforts throughout the entire lifecycle. Key steps involve defining the product, setting price and cost targets, achieving those targets, and maintaining competitive costs over time.

Uploaded by

Swati Goel
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Target costing 

is a pricing method used by firms. It is defined as "a cost management tool for

reducing the overall cost of a product over its entire life-cycle with the help of production, engineering,

research and design". A target cost is the maximum amount of cost that can be incurred on a product

and with it the firm can still earn the requiredprofit margin from that product at a particular selling

price.

In the traditional cost-plus pricing method materials, labor and overhead costs are measured and a

desired profit is added to determine the selling price.

What is target costing?

Target costing involves setting a target cost by subtracting a desired profit margin from a competitive

market price.[1] [2]

A lengthy but complete definition is "Target Costing is a disciplined process for determining and

achieving a full-stream cost at which a proposed product with specified functionality, performance,

and quality must be produced in order to generate the desired profitability at the product’s anticipated

selling price over a specified period of time in the future." [3]

This definition encompasses the principal concepts: products should be based on an accurate

assessment of the wants and needs of customers in different market segments, and cost targets

should be what result after a sustainable profit margin is subtracted from what customers are willing

to pay at the time of product introduction and afterwards. These concepts are supported by the four

basic steps of Target Costing: (1) Define the Product (2) Set the Price and Cost Targets (3) Achieve

the Targets (4) Maintain Competitive Costs.

To compete effectively, organizations must continually redesign their products ( or services) in order

to shorten product life cycles. The planning, development and design stage of a product is therefore

critical to an organization's cost management process. Considering possible cost reduction at this

stage of a product's life cycle (rather than during the production process) is now one of the most

important issues facing management accountants in industry.

Here are some examples of decisions made at the design stage which impact on the cost of a product.

1. The number of different components

2. Whether the components are standard or not

3. The ease of changing over stoo

Japanese companies have developed target costing as a response to the problem of controlling and

reducing costs over the product life cycle.

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