Target Costing

Prof. Priyanka Acharya

Meaning of target
costing

It is a systematic approach to establish product cost based

on market driven standards
It is a difference between sales price needed to capture a
predetermined market share and desired per unit profit
Target Cost = Target Price Target Profit

Meaning of target
costing
Idea of target costing is about going upstream to achieve
cost reduction
It is market orientated i.e. it involves ascertaining of the
product cost before hand by working back from an expected
future market price
Where the target costing approach is adopted, market prices
determine product costs, and cost-plus pricing is not used.

Steps in implementing
Target Costing

Determine the market price

Determine the desire profit
Calculate target cost at market price less desired profit
Use Value engineering to identify ways to reduce product
cost
Use operational control to further reduce costs

Subtract
target
income

TARGET COSTING
Determine target
Selling price

Arrive at
target cost

Design of
goods and
Services

Market Place

TRADITIONAL COSTING

Determine
cost

Add
markup

Establish selling
price

Cost Reduction Methods &

Target Costing

Value engineering is used to reduce product cost by

analyzing the trade offs between different types of product
functionality and total product cost
Functional Analysis: performance and cost of each major
function or feature of the product is examined
Design Analysis: Several possible designs are prepared of the
product ,each having similar features that have different
levels of performance and different costs

Cost Reduction Methods &

Target Costing
Cost tables: are computerized based
databases
that
include
comprehensive
information about the firms cost drivers
Group Technology: It is
a method of
identifying similarities in parts of products a
firm manufactures so the same parts can be
used in two or more products thereby
reducing costs
Kaizen Costing: Mechanism for
actual costs below standard costs

reducing

Cost Reduction Methods &

Target Costing

Reverse Reengineering (Tear Down):

Competitors products are closely
analyzed in an attempt to discover
more design features that create cost
reductions

Advantages
Helps
management
in
preparing
schedules
of
projected
production
volumes based on relationship between
price and volume
Helps
in
coordinating
management activities

different

Advantages

Facilitates cost reduction programs in a firm

as current costs of the firm are oriented and
driven towards target cost. The difference
between a firm current cost and target cost
indicates the grey area for management
attention to reduce cost
Target costing is allied with the objective of
continuous profit
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Factors involved Target

Costing
1.

Understanding Customer Requirements

2.

Gathering market information

3.

Documenting customer requirements

4.

Competitor Information

5.

Cost Structure Analysis

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Factors involved Target

Costing
6. Product Design
7. Value Engineering
8. Supplier Involvement
9. Compressed Development Cycle
10.Cross functional
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