Target Costing Essay

427 Words2 Pages
TARGET COSTING Target costing is a system of profit planning and cost management. Target costing concerns more on costs management rather than product costing. It was devised in Japan but with the effect of globalization, it is gradually gaining acceptance in the Western World. The processes involved in target costing start with anticipating target selling price which is based on market considerations such as customers’ expectations and competitors’ behavior, as well as the business’ strategic objectives for the product. The next process is determining the target profit margin which is based on an assessment of the return on sales required to make an acceptable profit on the product. This would be influenced by the profit performance of similar products and the long term profit objectives of the business. Lastly, target cost is obtained by deducting the target profit margin from the target selling price. In other words, target cost is the cost at which the product must be produced if it is to be sold at the target selling price and generate the rate of return required by the business. There are many ways to achieve target cost in order to successfully manage the costs. The degree of cost reduction required to achieve target cost is called the cost reduction objective. Cost reduction objective is the difference between the target cost and the current cost of producing the desired product. The challenge to remove cost from the product to achieve the cost reduction objective is often undertaken by a cross-functional team. This team may consist of members representing the key activities across the value chain, such as production, product design, purchasing, marketing and accounting. The team is to locate where in the value chain the cost savings can be found. For example; How much cost reduction can be achieved in product design? And; How much in the manufacturing

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