Glossary
Target Costing
Tags: Glossary
A target cost is calculated by subtracting a desired profit margin from an estimated or market-based price to arrive at a desired production, engineering, or marketing cost. This may not be the initial production cost, but one expected to be achieved during the mature production stage. Target costing is a method used in the analysis of product design that involves estimating a target cost and then designing the product/service to meet that cost.
What is Target Costing?
Target Costing
Target costing is a method used in the analysis of product design that involves estimating a target cost and then designing the product or service to meet that cost. It is a strategic approach that helps companies achieve their desired profit margins while remaining competitive in the market.
To understand target costing, it is important to first grasp the concept of a target cost. A target cost is calculated by subtracting a desired profit margin from an estimated or market-based price. This desired profit margin represents the amount of profit a company aims to make from selling the product or service. By subtracting this profit margin from the estimated price, the target cost is determined.
It is worth noting that the target cost may not be the initial production cost. Instead, it is the cost expected to be achieved during the mature production stage. This means that as the production process becomes more efficient and economies of scale are realized, the cost of producing the product or service should decrease, ultimately reaching the target cost.
The goal of target costing is to align the design and production processes with the target cost. By doing so, companies can ensure that the product or service is developed in a way that allows for profitability while meeting customer expectations and remaining competitive in the market.
To implement target costing effectively, companies need to involve various departments, including production, engineering, and marketing. Collaboration between these departments is crucial to ensure that the target cost is achievable and that the product or service meets customer needs.
Target costing encourages a proactive approach to cost management. Instead of simply accepting the cost of production as it is, companies actively work towards reducing costs by optimizing the design, materials, and production processes. This approach helps companies remain competitive by offering products or services at a price that customers are willing to pay while still generating the desired profit margin.
In conclusion, target costing is a method used in product design analysis that involves estimating a target cost and then designing the product or service to meet that cost. It allows companies to align their design and production processes with the desired profit margin, ensuring profitability while meeting customer expectations. By actively managing costs and optimizing various aspects of production, companies can remain competitive in the market and achieve their financial goals.