August 6, 2017

Target Costing and Target Cost Management

Strategic Cost Management Course Articles

Target costing is strategic decision.

Target costing is based on three premises: 1.) Product design and development has to be oriented to customer affordability or market-driven pricing, 2.) Product cost is to be treated as an objective or a constraint variable determined by the market conditions during the definition of a product's requirements, and 3.) Proactively working to achieve target cost during product and process development.

Target costing builds upon a design-to-cost (DTC) approach with the focus on market-driven target prices as a basis for establishing target costs. The target costing concept is similar to the cost as an independent variable (CAIV) approach used by the U.S. Department of Defense and to the price-to-win philosophy used by a number of companies pursuing contracts involving development under contract. 

The company can have a policy of target costing. For any new product to be introduced, marketing comes out with an estimate of the price and sales quantity schedule. From this information, and information available on capital outlays required (an approximate estimate), a decision is taken to target a price point. From this price point, the required profit margin is deducted to get a target cost for the product and the product development team is given this target cost as the development goal. Therefore, development has a technical goal, the new product has to perform the specified function, it must be durable, maintainable, it must have quality, and also it has to be within the target cost.
To ensure that the developed product is within the target cost, the development team needs cost estimation assistance on a continuous basis. Value engineering is normally taken up after some years of selling the new product. Target costing requires concurrent value engineering. Value engineering requires cost information.

Cost accountants and cost estimators have a significant role to play in an organization which is pursuing target costing as a strategy.

For More Detailed Reading

Target Costing

What is Target Costing? A Presentation in pdf format

Best Practices in Target Costing

Index of articles on Financial, Cost and Management Accounting 

Original Knol - 2utb2lsm2k7a/ 380

Updated 7 August 2017, 24 November 2011

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