Reaction Paper

Formula for Success : Target Costing for Cost plus Pricing Companies
By :

Dicky Triyadi

Dinny Firvidiani

Dwi Rahmadani Davis

After our group do discussion about this topic, we know what is the advantage and
disadvantage of target costing and cost plus pricng and also why the company use this
method. as we know the use of the target costing and cost plus pricing methods re the method
that can be use to give explanation about relationship provit and costbecause as we already
know, a successful company is a profit-oriented company that gets during a period. the profit
can be obtained by the company by charging prices to customers for the goods and services
offered. therefore, this method is the right method to explain and determine the relationship
between profits and costs must be the focus of a company to be managed so that it benefits
the company.

Target costing is a cost system that determines in advance the cost data to be followed
by all activities in a company. With this method, management is required to carry out a
research process in order to know the market conditions regarding customers and competitors
first before determining the target cost in a company. However, doing target costing requires
a long time and great effort in researching and designing products but it is very good to apply
to companies that have a high level of competition in the market.

In calculating target costing, there are two methods, namely additive and deductive
methods. In the additive method, the company focuses on the individual components of a
product produced by reducing the cost of components of some products while others are
raised so that the overall cost of the product can be reduced. while in the deductive method,
the company is more focused on reducing the selling price of the product which will
ultimately determine the target cost of the product. in general, the deductive method is
recommended rather than the additive method because it links the product target cost with the
profit set by top management and fits in the mechanism of value engineering that depends on
this cost relationship to set the profit target.

Cost plus price is the simplest method a company can use to determine prices, and
realize the basic ideas that have been set before doing business. For example, when a
company makes a product, then sells it more than the company spends to make it (because
the company has added value by providing the product). There are two ways of determining
the price-based on the actual cost plus a fixed fee and on the basis of the estimated cost, plus
a fixed fee. Thus, many businesses today use cost plus price as their primary pricing strategy
when releasing products such as useful in companies that seek unique market positions by
differentiating their products by from competitors. Because of, cost plus pricing ensures that
the full cost of creating the product or fulfilling the service is covered, allowing the mark-up
to ensure a positive rate of return. This method also involves only a little market research,
and especially helpful when you have no information about a customer’s willingness to pay
and there aren’t direct competitors in the marketplace

But cost plus price is not ideal for most businesses due to a number of deficiencies
which are very inefficient in guaranteeing a target rate of return thus creating little incentive
to cut costs or to increase profitability through price differentiation. In addition, because of
the minimal costs used to conduct research so that the offer given by a company is the same
for all competitors and that sometimes happens when the company is stuck by fulfilling
orders or the number of items the company is offering to customers. This happens because
the company does not consider customers in obtaining profits.