Why Do Firms Use Target Costing How Are Target Costs Established?

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.

How does target based costing work?

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 is the first step in target cost pricing?

Target Costing Process

Determine selling price for the new product and estimated output from market analysis and target profit. Ascertainment of the target cost by deducting the profit from the selling price. Decide the estimated product cost. Make comparison between estimated cost and target cost.

What are the benefits of target costing?

A primary advantage of target costing is that it allows you to analyze the best way to make or acquire products at the lowest costs. Minimizing costs is a common financial goal of any small business, regardless of whether they offer high, medium or low prices.

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.