TA RGE COS TIN

T G
JANEESHAV
V 17/MBA
/2021
 DEFINITI
ON
"A structured approach for determining the cost at which a prposed
product with specified functionality and quality must be produced to
generate a desired level of profitability at its anticipated selling price."

CIMA defines Target Cost as "a product cost estimate derived from a
competitive market price"
 STAGES IN Set target selling price
TARGET based on customer
expectations and sales
COSTING forecast

Establish profit margin

based on long-term profit
objectives and projected
volumes

Determine target cost per

Estimate the "current
unit (target selling
cost" of the new
price less required
product"
profit margin)

Compare
with

Establish cost reduction targets for

each component and the production
activity, using value analysis and value
engineering
OBJECTIV ES

To lower the costs of new products so that the required profit level can
be ensured by establishing a maximum target cost by working
backward from the estimated market prize.
The new products meet the levels of quality, delivery timing and
price required by the market.
To motivate all company employees to achieve the target profit
during new product developement by making target costing a
company wide profit management activity.
 T E C H N I Q U E S O F T AR G E T C O
ST I N G
A.Tear-Down Analysis:- Making analysis of a competitor's product in order to identify
the opportunities for product improvement and/or cost reduction. This aims to
benchmark provisional product design with the design of the competitior and to
incorporate any observed comparative adantage of the competitor's approach to the
product design.

B.Value Engineering:- A systematic interdisciplinary examination of factors affecting the

cost of a product or service in order to devise means of achieving the specified purpose
at the required standard quality and reliability at the target cost.

C.Kaizen Costing:- A method of costing that involves making continuous, incremental

improvements to the production process during the manufacturing phase of the
product/service life-cycle.
 TARGET COSTING
Cont'd
Target costing is an allowable cost for the product or service, given a competition price,
so that the company can earn the desired profit margin.

Target cost = Competitive market price - Required profit

The target cost is determined by working from the market price of product to the cost
that will allow a company to earn a target profit.

In order to reduce cost to a target cost level, companies have

to: Redesign the product or service
Use advanced cost management techniques to seek higher productivity,
and Use new and advanced technology in the manufacture of goods
and services.
 Advantages of Target
Costing
Reinforces top to bottom commitment to process and product
innovation to acheive competitive advantage.
Helps to create a company' s market - driven management for
designing and manufacturing products that meet the price required
for the market success.
Reduces the costs of product significantly
Reduces the development cycle of a product
Alligns the costs of features with customer' s willingness to
payfor them
Engages customers and suppliers to design the right product and to
more effectively integrate the entire supply chain.
 Limitations of Target Costing

Any miscalculation in target costing, which depends on the estimation of the product's
final selling price, could lead to the failure of the entire marketing strategy.
The business can use less expensive technology or materials to meet the target cost,
which is ultimately unfavourable and even turns out to be the worst disadvantage.
Target costing can place an unreasonably heavy strain on the production line
when the predicted cost is too low.
A loss may result when the company doesn't sell all of the quantity it produces
due to improper quantity assessment.