Explain "Target Costing" and how it may be applied

Target Costing (TC) is technique that focuses on managing costs during a product’s planning and design phase. TC is a customer-oriented approach.

Target costing (TC) is an approach aimed at reducing the life cycle costs of new products while ensuring quality, reliability and other customer requirements, by examining all possible ideas for cost reduction at the product planning, research and development and the prototyping phases of production. It is not just a cost reduction technique but is part of a comprehensive strategic profit management system.
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Target Cost-Setting Process

 Develop a product concept and then determine the price that customers are willing to pay for it to achieve the desired market share.

 A target or desired profit margin is deducted to get a target cost for the product. The target profit margin can be based on a required return on the new investment or profit as a percentage of sales.

 If the estimated actual cost of the product exceeds the target cost, value engineering and value analysis and continuous improvement will be used to close the cost gap.

 It is important that target costing is supported by an accurate costing system using appropriate cause-and-effect cost drivers for cost assignment.



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