TARGET COSTING:Delighting Your Customers While Making a Profit
Target Costing is a simple, straightforward process that can have significantimpact on the health and profitability of many, if not most, businesses. It doesn'trequire an army of specialists, large-scale software implementations, or complexmanagement structures and procedures. It's mostly logical, disciplined commonsense that can be imbedded into a company's existing procedures andprocesses.We spent our recent professional careers applying Target Costing to a widerange of products, processes and procedures in a large manufacturingcompany. We quickly came to learn that Target Costing helps to:
assure that products are better matched to their customer's needs.
align the costs of features with customers’ willingness to pay for them.
reduce the development cycle of a product.
reduce the costs of products significantly.
increase the teamwork among all internal organizations associated withconceiving, marketing, planning, developing, manufacturing, selling,distributing and installing a product.
engage customers and suppliers to design the right product and to moreeffectively integrate the entire supply chain.Target Costing has been shown to consistently reduce product costs by up to 20-40%, depending on the product and market circumstances.
What is Target Costing?
Our working definition, adapted from Cooper, is asfollows:
Target Costing is a disciplined processfor determining and realizing a total costat which a proposed product with specifiedfunctionality must be producedto generate the desired profitabilityat its anticipated selling price in the future.
Target Costing is a disciplined process that uses data and information in a logicalseries of steps to determine and achieve a target cost for the product. Inaddition, the price and cost are for specified product functionality, which isdetermined from understanding the needs of the customer and the willingness of the customer to pay for each function.