Target costing is a structured approach to determine the cost at which a proposed product with specified functionality and quality must be produced in order to generate the desired level of profitability over its life cycle at its anticipated selling price.
Target costing is the first step in managing product costs.
What is the process of target costing How is target cost calculated?
Target costing is an approach to determine a product’s life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit. It involves setting a target cost by subtracting a desired profit margin from a competitive market price.
What are the objectives of target costing?
The fundamental objective of target costing is to enable management to use proactive cost planning, cost management and cost reduction practices whereby, costs are planned and managed out of a product and business, early in the design and development cycle, rather to an during the later stages of product development
Why do firms use target costing?
Target costing adds value to the production process by eliminating non-value added activities, thus paving the way for decreased costs passed on to the consumer. Target costing enables companies to ascertain a more realistic price as well as strengthen competition among firms to offer quality products at lower costs.
What is target pricing strategy?
The target pricing strategy is the structure approach that determines the price at which a proposed product of a determined quality and functionality should be produced in order to yield the desired profits at the anticipated selling price.
What are the disadvantages of target costing?
Target costing can create an unrealistic burden on the production department when the estimated cost is too low. Failure of proper estimation of the quantity may lead to a loss when the business fails to sell all the produced quantity.
What is a 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.