Quick Answer: 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.

What is a target cost per unit quizlet?

target cost per unit. Estimated lon-run cost per unit of a product or service that enables the company to achieve its target operating income per unit when selling at the target price. Target cost per unit is derived by subtracting the target operating income per unit from the target price.

What is target total cost?

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.

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.

What is the first step in target cost pricing?

The target costing process begins by establishing a selling price, based on market research, for the new product. From this target selling price, the desired (target) profit is subtracted to determine the target cost. In all likelihood, this target is below the company’s current manufacturing cost.

What is the target cost and how is it determined?

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 is the first thing marketers must do when using value based pricing?

What is the first thing marketers must do when using​ value-based pricing? Assess customer needs and value perceptions. Beyond the nature of the​ market, demand, and the​ economy, what other factors in a​ firm’s external environment must a company consider when setting​ prices?

How is target cost calculated?

Target costing has four steps:

  • Design a product that provides the features and price demanded by customers.
  • Determine the company’s desired profit.
  • Derive the target cost by subtracting the desired profit (from step 2) from the desired price (from step 1).
  • Engineer the product to achieve the target cost (from step 3).

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 cost gap?

The target cost gap is the estimated cost less the target cost. When a product is first manufactured, its target cost may well be much lower than its currently-attainable cost, which is determined by current technology and processes.

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 aggressive pricing?

Aggressive here can mean very high prices or very low prices depending on whether you’re buying or selling. If you’re selling, aggressive pricing means your prices would be low to encourage sales, whereas if you’re buying, you would offer a higher price than your competitors.

What are the advantages of target costing?

Main advantages of target costing are:

It reinforces top to bottom commitment to process and product innovation to achieve some competitive advantages. b. It helps to create a company’s market-driven management for designing and manufacturing products that meet the price required for the market success.

How is target cost and different from standard cost?

Differences between standard cost and target cost. A standard cost is predetermined budgeted unit cost of product or service, under specified working conditions. A target cost, on the other hand, is the desired cost. It may not be achieved under current working condition but will require changes in production methods.

What is target rate of return pricing?

A target return is a pricing model that prices a business based on what an investor would want to make from any capital invested in the company. Target return is calculated as the money invested in a venture, plus the profit that the investor wants to see in return, adjusted for the time value of money.

What is construction target cost?

Target cost for construction. Target costs are generally associated with cost-reimbursable contracts. They introduce a mechanism enabling the contractor, and sometimes the consultant team, to share in the benefits of cost savings, but also to bear some of the client’s cost when there are cost overruns.