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  • Target Costing Summary CA CMA BY TAHA POPATIA

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    Zohair Humayun
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    Target costing involves setting a maximum cost for a product or service based on the desired sales price and profit margin. During product development, the estimated costs are compared to the target cost, and any cost gap must be addressed by finding ways to reduce costs through value analysis, reverse engineering or discounts. Target costing helps improve cost understanding and focus on customer value. It can also be used for services by targeting ways to reduce typically high overhead costs.

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    Target costing involves setting a maximum cost for a product or service based on the desired sales price and profit margin. During product development, the estimated costs are compared to the target cost, and any cost gap must be addressed by finding ways to reduce costs through value analysis, reverse engineering or discounts. Target costing helps improve cost understanding and focus on customer value. It can also be used for services by targeting ways to reduce typically high overhead costs.

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    6 views1 page

    Target Costing Summary CA CMA BY TAHA POPATIA

    Uploaded by

    Zohair Humayun
    Target costing involves setting a maximum cost for a product or service based on the desired sales price and profit margin. During product development, the estimated costs are compared to the target cost, and any cost gap must be addressed by finding ways to reduce costs through value analysis, reverse engineering or discounts. Target costing helps improve cost understanding and focus on customer value. It can also be used for services by targeting ways to reduce typically high overhead costs.

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    Target costing summary CA CMA BY TAHA POPATIA

    Target Costing

    • Involves setting a target or objective for the maximum cost of a product or service.
    • Market Sales price – target/desired profit margin = Target cost.
    • Target cost = maximum cost in order to meet the desired profit margin.
    • The opportunity for cutting costs is much greater at the product design stage than after it has been
    developed. Therefore, target costing should be used at the development stage of the product.
    • The estimated cost of the product at the time of development must be compared with target cost. If the
    estimated cost exceeds the target cost, cost gap exists.
    • Cost gap = Estimated/Current cost – target cost.
    • There are different ways to close the cost gap which include: value analysis, reverse engineering and
    obtaining discounts.

    Advantages of target costing

    • Helps improve understanding about the cost of a product.


    • Creates a focus on what customers value.

    Target costing and services

    • Method can be used for services.


    • Overhead costs in service industry are very high therefore effective target costing will require a focus on
    how to reduce overhead costs.

    1|Page ARTT BUSINESS SCHOOL SIR TAHA POPATIA

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