TARGET COSTING

SHABESH
23MBA28
Target costing:
• Target costing can be defined as a cost management tool for reducing the overall cost of a
product over its product life cycle. This pricing technique is utilized to meet the demands
of customers on one hand and organization's profit goals on the other.
• Target Price is the estimated price of product or service which a potential Achieve
customer will be willing to pay
• Target Profit refers to the amount of profit while the firm will like to make from a
particular product
steps for installation of target costing approach
The following steps must be taken to instal target costing approach to bring in the desired mults:
1. Establishment of market-driven price: The target price is determined on the basis of market
factors, e.g., company's status in the market, marketing strategy, competitive price structure, anticipated
market share as per demand forecasting etc. Customer's willingness to pay is of utmost significance.
2. Determination of Target Cost: After establishing the target price, target cost is worked out by
deducting standard profit margin from the price: The target cost is allocated down to lower levels in a
manner consistent with the structure of teams or individual responsibilities.
3. Balancing of target cost with product requirements: Before finalizing the target cost, product
requirements are also required to be considered. Product requirements or specifications must be set by
thorough analysis of customers' choices and preferences, use of conjoint analysis to understand the
value customers put for the product and application of other techniques to match product
requirements with target cost.
4. Setting up of target costing process: A well-defined process which integrates activities to support
target costing needs to be set up. Early and proactive consideration of target costing is required and
for this various tools and techniques are used.
5. Establishment of coherent organizational structure: An organizational structuration's of which
integrates cross-functional disciplines, e.g., marketing, production, engineering, purchasing, finance
etc. is desired to be established in which there is a clear demarcation order to of authorities and
responsibilities in order to have coherence and complete co-ordination
6.Reorientation of culture and attitudes.
Mindsets of people are also very important to be re-oriented so that they don't resist to an approach in
which reverse methodology of cost determination is applied and the entire team is asked to work
accordingly to reduce cost on one hand and improve quality on the other - which appears, prime facie
to be self – contradictory

7. Analysis of Alternatives.
Once voluntary support to the approach is developed within the organisation, different alternatives
automatically crop up in the minds of those involved in the process. Various alternatives can be
chalked out, properly evaluated and then decisions taken to achieve the goal. For evaluation and
decision making, a number of quantitative tools are also available now which will yield fruitful
results.
8.Methodologies
. Methodologies for implementation of target costing system include guidelines, databases, training,
procedures and supporting analytical tools. Different tools and methodologies may be used to design for
manufacturability, etc.
9.Reduction of Overhead Costs.
Since overhead cost forms a substantial part of the total cost, it also needs to be focused upon by
examining them, re-engineering the processes and minimizing non-value added costs.
10.Measurement of Results.
Current estimated costs must be compared with the target costs - the comparison should be on a
continuous basis and at each and every stage of production. Review of costs may also be required at times.
Similarly actual costs are also required to be put against target cost and causes of variations explored to
take developed suitable corrective actions.
Advantages
Process Improvements: It shows the management's ability and intention to improve the processes
and inject product innovation as well.
Customer Expectation: The product is created per the customer's expectations, enabling the
management to align the cost most effectively.
Economies of Scale: It helps companies create economies of scale in the long run since, as the
cost efficiency improves, the financial performance also increases.
Market Opportunities: It also helps create new market opportunities by lowering the cost
compared to its competitors.
Efficient Management: It improves management efficiency as well.
Disadvantages
Rely on Final Selling Price: This entire costing is based upon the fixation of the selling price of the product.
An error in estimating the selling price may fail the whole marketing strategy.
Low Estimation of Selling Price: By fixing a lower selling price of the product, it will burden the total cost
and the production department.
Inferior Technology: Sometimes, to reach the targeted cost, the management may compromise on the
technology and inferior methods to keep the price in control, which may, in turn, go against the company.
Ascertaining Quantity: While ascertaining the target cost, the company management must keep the
quantity they need to sell to achieve the desired result. If the company cannot sell these many units, it will
suffer massive losses, pushing the cost upwards
THANK YOU !