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    Target Cost

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    Warda Rizvi
    Target costing is an integrated approach that determines product features, price, cost and design to ensure profit on new products. The target cost is the cost to create a product that can be sold at a target price. The target costing process involves setting a target price, determining the target operating income per unit, and calculating the target cost per unit. This allows a company to design products that meet customer needs while achieving the target costs and profits. The example of a company redesigning its PC product and using target costing to lower costs by $1,800 per unit illustrates this process.

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    Target Cost

    Uploaded by

    Warda Rizvi
    300 views5 pages
    Target costing is an integrated approach that determines product features, price, cost and design to ensure profit on new products. The target cost is the cost to create a product that can be sold at a target price. The target costing process involves setting a target price, determining the target operating income per unit, and calculating the target cost per unit. This allows a company to design products that meet customer needs while achieving the target costs and profits. The example of a company redesigning its PC product and using target costing to lower costs by $1,800 per unit illustrates this process.

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    Target costing is an integrated approach that determines product features, price, cost and design to ensure profit on new products. The target cost is the cost to create a product that can be sold at a target price. The target costing process involves setting a target price, determining the target operating income per unit, and calculating the target cost per unit. This allows a company to design products that meet customer needs while achieving the target costs and profits. The example of a company redesigning its PC product and using target costing to lower costs by $1,800 per unit illustrates this process.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    300 views5 pages

    Target Cost

    Uploaded by

    Warda Rizvi
    Target costing is an integrated approach that determines product features, price, cost and design to ensure profit on new products. The target cost is the cost to create a product that can be sold at a target price. The target costing process involves setting a target price, determining the target operating income per unit, and calculating the target cost per unit. This allows a company to design products that meet customer needs while achieving the target costs and profits. The example of a company redesigning its PC product and using target costing to lower costs by $1,800 per unit illustrates this process.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 5

    Target Costing

    Target costing is an integrated approach to determine


    product features, product price, product cost and
    product design that helps ensure a company
    will earn reasonable profit on
    new products.

    Target cost is the cost of resources that should be


    consumed to create a product that can be
    sold at a target price.
    Target Costing Process
    A target price is the estimated price for a product/service that potential
    customers will pay.
    Target Cost = Target price – Profit margin.
    Target Price
    Target price is the estimated price for a product/service that potential
    customers will pay.
    Target Operating Income Per Unit
    Target operating income per unit is the operating income that a company
    aims to earn per unit of a product/service sold.
    Target Cost Per Unit
    Target cost per unit is the estimated long-run cost per unit of a
    product/service that enables the company to achieves its target operating
    income per unit when selling at the target price.
    Four components of target costing process
    (1) Planning and market analysis
    (2) Development
    (3) Production design
    (4) Production and continuous improvement.
    Target Costing Illustrated
    We illustrate the step-wise target pricing and target costing below.
    Assume HCL Ltd. manufactures two brands of personnel computers (PCs):
    Deskpoint and Provalue. Deskpoint is HLL’s top-of-the-line product, a system
    with very good processer. Provalue is a less powerful chip-based machine. The
    HLL currently produces 1,50,000 units of Provalue. The per unit sale price of
    Provalue is Rs 10,000. The full cost of Provalue is Rs 1,35,00,00,000 consisting
    of manufacturing cost of Rs 102,00,00,000 and operating cost of Rs
    33,00,00,000.
    Step 1: Develop a Product That Satisfies Needs of Potential Customers
    Marketing research indicates that customers do not value Provalue’s extra
    features such as special audio features and designs that accommodate
    upgrades that can make the PC run faster and perform calculations more
    quickly. They want HLL to redesign Provalue into a no-frills PC and sell it at a
    much lower price. The HLL is, accordingly, planning design modification for
    Provalue.
    Step 2: Choose a Target Price
    The HLL expects its competitors to lower the price of PCs that compete against
    Provalue by 15 per cent. The management of HLL wants to respond
    aggressively by reducing Provalue’s price by 20 per cent from Rs 10,000 to Rs
    8,000 per unit. At this lower price, marketing manager of HLL forecasts an
    increase in annual sales from 1,50,000 to 2,00,000 units.
    Step 3: Derive a Target Cost Per Unit (Target Price – Target Operating Income)
    The management of HLL wants a 10 per cent target operating income on sales
    revenues.
    Total target revenues = Rs 8,000 per unit × 2,00,000 units = Rs 160,00,00,000.
    Total target operating income = 0.10 × Rs 160,00,00,000 = Rs 16,00,00,000
    Target operating income per unit = Rs 16,00,00,000 × 2,00,000 units = Rs 800 per
    unit
    Target cost per unit = Target price per unit – Target operating income per unit =
    Rs 8,000 – Rs 800 = Rs 7,200
    Total full costs of Provalue = Rs 135,00,00,000
    Current full per unit cost of Provalue = Rs 1,35,00,00,000 ÷ 1,50,000 units = Rs
    9,000 per unit
    The target cost value of Provalue of Rs 7,200 is well below its existing Rs 9,000
    unit cost. The HLL’s goal is to reduce its unit cost by Rs 1,800. The cost reduction
    efforts should be extended to all parts of the chain value – from R&D to customer
    service including seeking lower prices from suppliers of materials and
    components.
    Step 4: Perform Value Engineering to Achieve Target Cost
    Value engineering is a systematic evaluation of all aspects of value chain
    business functions with the objective of reducing costs while satisfying customer
    needs. It can result in improvements in product design, changes in materials
    specifications and modification in process methods.

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