Target Costing

Presented by;
Anam Zaid
Roll No. 12
 Definition

“Target Costing is defined as a cost management tool

for reducing the overall cost of a product over its
entire life-cycle with the help of production,
engineering, research and design.”
Process of Target Costing
Traditional costing Vs. TC
Traditional costing (Cost-Plus method)
Market Research (needs and wants)
Product Design
Measuring Total cost
Selling Price = Total cost + Profit %
Drawbacks of Traditional costing
 If competitors selling price is equal to your total cost,
then you may bear loss.
 Traditional cost-accounting systems have tended to focus
only on the production phase and have not paid enough
attention to the product’s other life-cycle costs like disposal and
recycling cost.
6 Key Principles of Target costing
1. Price-Led costing:
 Look at the market price and than subtract desired profit
and get the expected allowable target cost .
Target Cost = Selling Price – Profit Margin

2. Focus on the Customers:

To be successful at target costing, management must listen to the
company’s customers.
 What products do they want?
 What features are important?
 How much are they willing to pay for a certain level of
product quality?
Principles (continued )
3. Focus on Product Design
Design engineering is a key element in target costing.
This design activity includes specifying
 Raw materials and components
 Production facilities
 Packaging and assembly
4. Focus on Process Design
Every aspect of the production process examined to make
sure that the product is produced as efficiently as possible.
 Labour
 Technology
 Global sourcing in procurement
Principles (Continued)
5. Cross-Functional Teams:
Manufacturing a product at or below its target cost
requires the involvement of people from many different
functions in an organization:
 Market Research and Sales department
 Design engineering and Procurement
 Production engineering and Production scheduling
 Material handling and Cost management

6. Life-Cycle Costs:
In specifying a product’s target cost, analysts
must be careful to incorporate all of the
product’s life-cycle costs.
 Costs of product planning
 Production
 Concept design
 Prototype testing
 Distribution and customer service
Application of TC
More Effective for New Product’s Planning and Designing
stages.
Why TC is effective for new products?
It is noted through studies, 70% to 80% cost is planned and
committed at design stages. If all focus is placed on cost
cutting at design stages then cost is managed according to
the plans efficiently and Effectively.
Mostly Used in;
 Manufacturing Companies specially automobile industry
like Honda & Toyota
 Healthcare
 Construction
Advantages
Stay competitive
Ensure success in the market
Deliver Product’s optimal value (decrease less imp.
Features)
Reduced development cycle (eliminate unnecessary
steps)
Maximum Customer satisfaction
Allow teams to work together for reducing cost
Provide cost control at all stages of pr0duct like
planning, designing, repairing and disposal/recycling.
Disadvantages
Time consuming (delay in production)
Pressure to cut cost may lead to organizational
conflicts. (teams conflicts)
Too much cost reduction may hamper smooth
functioning of departments.
Difficult to apply in service industries due to
intangibility and high level of specialties.