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Target Costing

The document discusses target costing, which is a technique used to determine the target product cost based on the sale price and gross margin percentage set by management. It describes how target costing structures costs into direct and indirect categories. It also outlines techniques for reducing costs such as value engineering, kaizen costing, and activity-based management. Finally, it provides an example comparing cost-plus pricing to target costing for a company bidding on an automotive contract.

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Rahul Pandey
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1K views9 pages

Target Costing

The document discusses target costing, which is a technique used to determine the target product cost based on the sale price and gross margin percentage set by management. It describes how target costing structures costs into direct and indirect categories. It also outlines techniques for reducing costs such as value engineering, kaizen costing, and activity-based management. Finally, it provides an example comparing cost-plus pricing to target costing for a company bidding on an automotive contract.

Uploaded by

Rahul Pandey
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 PPTX, PDF, TXT or read online on Scribd
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Target Costing

Presented By : Rahul Pandey (1033) Reshu Varshney (1034)

Target Costing

Target Cost Analysis


Existing Cost Structure Price (set by market) Gross margin (set by management) Part A

Part B
Part C
Direct labor

Target Cost Structure


Part A Part C Direct Labor Indirect Cost 2 Indirect Cost 3 Indirect Cost 4

Target Product Cost (Price-Gross Margin)

Indirect cost1 Indirect cost 2 Indirect cost 3 Indirect cost 4

TECHNIQUES OF COST REDUCTION


Value

engineering (during design and development) Kaizen costing (during production) Activity-Based Management (during all stages of product life)

EXAMPLE
ITT Automotive receives invitation from ford to bid on the ABS to be used in a new model car Estimated current manufacturing cost = $154 Gross margin rate = 30% on sales Highly competitive market Sale price = $200 per unit

COST-PLUS PRICING

Let x be the price 70% of price = actual cost 70x/100 = 154 X = $220 Rejection of bid

TARGET COSTING
As 70% of price = actual cost Sale price = $200 Target cost = 70% of 200 = $140 Required cost reduction = $154-$140 = $14 If commitment for cost reduction, company can bid at $200

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