Target Costing Process

Target Costing Process

1.                            Design

First step target costing is to study the Design and customer requirement are in detail. A product design is selected as per requirement of the customer. New feature are incorporated as per requirements of customers.

2.    Target Cost is set

Target cost is set for product keeping in view the price & profitability .it means target cost is calculated by subtracting profit from the selling price i.e. Target cost= selling price – desired profit level.

3.    Initial Development

Produce is initially developed keeping as per designed. The first designed is ordinarily not the final product and number of adjustment is required.

4.    Initial Development Cost & target cost

Initial development cost of product is compared with set target cost for identification of any gap in cost. If development cost exceeds the target cost, then there is cost Gap.

5.    Cost Gap is removed

Cost gap is removed by number of ways including changing the design, reviewing the supply chain, economies of scale, efficient method production.

Target Costing Steps

Target Costing Steps

Target Cost establishment consist of three steps. Target cost establishment may also be referred as target cost setting or target cost calculation.

1.    Price Determination

In First place the price of a product is decided. The product price is decided keeping in view the target market and competitive prices of close product.

2.    Profitability

Second step for establishing the target cost is to determine desired level of profit. Every business is operated for the profit and therefore a desired level of profit is to be incorporated for calculating target price.

3.    Target Cost

In third step target cost is set. The target cost is set by simple mathematical calculation i.e. selling price minus desired profit or profit rate.

Target Costing Concept

Target Costing Concept

Target costing is to provide new or improved goods to the customer with reasonable price (cost target). It means that cost of production must not exceed the maximum limit set by the management. These limits are set by the management keeping different factor in mind competition, profitability etc.

1.    Innovative New product

Target costing concept was introduced to meet the customer demand for improved goods. Cost can be more effectively controlled at design stage, and therefore this method is more relevant for new products.

2.    Design Stage

Target costing more focuses on design stage, because cost can effectively be controlled at this stage, once product is designed and launched, then it is very difficult to control costs.

3.    Maximum Cost limits

A limit for the cost is set for proposed product, because every product can only be sold at a specific price. Therefore a maximum cost for designing a proposed product is set keeping in view the desired price & profit margin.