Target Costing Method
Target costing is a cost management tool which is used to set a target cost for a product. It is used by organizations to develop strategies for cost reduction and to achieve the desired price point for the product in the market. This method enables the organization to reduce the cost of the product without compromising on its quality and performance. By using this method, the organization can identify areas where costs can be reduced and determine the price at which the product should be offered in order to be competitive in the market.
Target costing involves several steps to set the target cost for a product. Firstly, the target selling price for a product is established. This price is based on the customers perception of the price and the organization’s objective to alter its cost structure. Secondly, the target cost is calculated by subtracting the expected profit margin from the target selling price. This is generally referred to as target margin. Next, the target cost is allocated to the various components of the product or process.
The target cost is then compared with the estimated cost to determine if the organization is able to meet the desired cost target. If the estimated costs exceed the target cost, value engineering is employed to reduce the cost of the product. Value engineering involves finding ways to reduce the cost of each component of the product, while maintaining its quality and performance. This method can be used for existing products as well as for products that are under development.
Once the target price is established, the organization needs to make sure that the cost of the product does not increase during the development process. To achieve this, it is important to continually monitor the costs during the development process and be flexible in the design and production processes. This enables the organization to keep the costs down, while meeting the desired quality levels.
In order to successfully use target costing, a team of experts needs to be formed. The team should be comprised of marketing, engineering and finance experts. The team should review the target cost and margin, then develop strategies to reduce costs. Additionally, the team should also ensure that necessary quality control measures are in place to ensure that the product meets the customer’s requirements.
To summarize, target costing is a cost management tool which is used to set a target cost for a product. It enables the organization to reduce the cost of the product without compromising its quality and performance. It involves setting the target selling price of the product, calculating the target cost, estimating the cost and employing value engineering to reduce the cost of the product. Additionally, an expert team should be formed to ensure that the product meets the desired quality levels.
