Target costing involves a reverse analysis of the product, starting with the selling price.
The company considers the projected price for each unit and its desired profit on the item.
The company subtracts the desired profit from the selling price to determine the target cost per unit.
What is the target cost per unit?
Target Cost per unit: Target cost per unit is the estimated or predicted long run cost per unit of production of any product or service that when sold at a desired target price would enable a company to achieve or attain a predefined targeted income per unit.
How is target cost calculated?
Definition: The target cost of a product is the expected selling price of the product minus the desired profit from selling it. In other words, target cost is really a measure of how low costs need to be to make a certain profit.
How do you calculate cost per unit?
To calculate the cost per unit, add all of your fixed costs and all of your variable costs together and then divide this by the total amount of units you produced during that time period.
How do you calculate fixed cost per unit?
The formula to find the fixed cost per unit is simply the total fixed costs divided by the total number of units produced. As an example, suppose that a company had fixed expenses of $120,000 per year and produced 10,000 widgets. The fixed cost per unit would be $120,000/10,000 or $12/unit.
How do you find the selling price?
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Find Sale Price when Profit Percentage and Cost Price is given
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Who uses target pricing?
Target cost is then given to the engineers and product designers, who use it as the maximum cost to be incurred for the materials and other resources needed to design and manufacture the product. It is their responsibility to create the product at or below its target cost.