PERFORMANCE MANAGEMENT Target Costing Target costing is concerned with designing a product and its production process so that it can be made and sold at a cost that delivers the required profit at the chosen price. It focuses on getting the expected cost of a product down to a target cost amount Steps in Target Costing 1.Define product specification and estimate sales volume 2.Set a target selling price at which the company will be able to achieve the desired market share. 3. Estimate required profit based on profit margins or return on investment 4.Calculate target cost: (selling price-profit margin) 5, Estimate current cost 6.Calculate the target cost gap: Estimated product cost - target cost 7.Make efforts to close the cost gap \ Closing a target cost gap Reducing the number of components Using cheaper staff (where this does not affect quality) Using standard components wherever possible Acquiring new, more efficient technology Training staff in more efficient techniques Cutting out non-value added activities Using different materials (identified using activity analysis* etc Markup/Margin (if profit is 20%) Markup : cost(100%) + profit(20%) =Selling price 120% Margin : cost(80%) + profit(20%) =Selling price 100% hutch which it believes can be sold for $125. House it Co demands a margin of 25% on sales. Cost information for the new hutch is as follows: * Timber - The hutch needs 10 metres (m) of good quality planed timber. House it Co can acquire this at a cost of $48. 10% of timber input is wasted Felt roofing material - 2m*are required. Roofing material costs $17.50 /m2. Wire - 1m of wire is needed at a cost of $1.50 per metre. Labour - Labour is paid at a rate of $7 / hour Variable overhead - These will be incurred at a rate of $1.50 per labour hour. Fo House it Co produces rabbit hutches. It is about to launch a new top of the range Sajid Newaz KhanPERFORMANCE MANAGEMENT Required What is the target cost of the rabbit hutch? (Give your answer to two decimal places.) What is the expected cost to make the hutch? D> Calculation of normat toss Target Costing may be assisted by the following techniques: * Tear down analysis (also called" reverse engineering") —this involves examining a competitor's product to identify possible improvements or cost reductions. * Value engineering —involves investigating the factors which affect the cost of a product or service. The aim is to improve the design of a product so the same functions can be provided for a lower cost, of to eliminate functions which the customer does not value but which increase costs. * Functional analysis involves identifying the attributes/ functions of a product which customers value. The determination of a price the customer is prepared to pay for each of these functions is then performed. If the cost of providing the function exceeds the value, then the function is dropped A car manufacturer wants to calculate a target cost for a new car, the price of which will be set at $17,950. The company requires an 8% markup Whats the target cost? Target Costing in Service Industries Intangibility Inseparability/simultaneity Characteristics of services _Variability/heterogeneity Perishability No transfer of ownership Practice: https://www.classmarker.com/online-test/start/?quiz=9ca62a44e75e09da Sajid Newaz Khan