Target Costing


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for students who just want to understand TC in one go,Some real world and success stories of TC

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Target Costing

  1. 1. TARGET COSTING AT 1 LOOK<br />
  2. 2. WHAT IS TARGET COSTING<br />At first glance, a set of management techniques and calculation methods...<br />...built around the "key formula" : improve product design and planning till<br />Estimatedcost = target cost<br />Estimatedcost = target selling price - target profit...<br />...providing market-based cost targets for future products and deploying them to functions, components and parts through analytical methods.<br />
  3. 3. Target costing works in the opposite way, starting with market share and profit and working back to cost. <br />Establish a product specification <br />Estimate price needed to reach target market share <br />Estimate a target profit to reach a required return on capital <br />Determine the cost needed to reach this target profit. <br />Target costing often results in the identification of a cost gap i.e. current costs are higher than those needed to reach target profits. Management then need to develop strategies to close this gap. <br />
  4. 4. SELF TEST QUESTION FOR TARGET COSTING CONCEPT<br />A.Whatis a target cost? How is it different from a budgeted cost? <br />A target cost is the allowable amount of cost that can be incurred on a product and still earn the required profit from that product. It is a market driven cost that is computed before a product is produced. A budgeted cost is a predetermined cost after a product is in production. A budget is an operational definition of an allowable cost broken by items and by periods. <br />B. Why is it important to manage costs before products have been produced? <br />Nearly 80% of the costs of many products are committed at the design stage. Therefore, the best opportunity to reduce costs is during design and not after a product is being manufactured. <br />C. At what stage of the product development cycle does target costing play a key role? <br />Target costing occurs within the product development cycle. This means it starts when a product is in its concept stages and ends when a product has been released for manufacturing. <br />D. What is the difference between an allowable cost and an achievable cost? <br />An allowable target cost is the maximum amount that can be spent on a product. An achievable cost is the estimate that tells management whether the product and process design is capable of meeting the allowable cost target. <br />
  5. 5. Target Costing Is Different From Cost Plus Pricing <br />