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.

Target costing can be applied throughout the entire life cycle.

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.

What do you mean by target costing?

It involves setting a target cost by subtracting a desired profit margin from a competitive market price. A target cost is the maximum amount of cost that can be incurred on a product, however, the firm can still earn the required profit margin from that product at a particular selling price.

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.

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 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.