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

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 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.

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.

How is target costing calculated?

Target costing. 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.