Question

Besmite industries want to introduce a new product that is similar to their competitors. The target price is $400 and Bismite desired profit is 25%. What is the target cost? AND, assuming their costs are over this target cost, what is the name of the process they go through next? If you can not recall the name of the process, list three things they can or cannot do.

Answer 1

Target Profit Margin = 25% of $400 = $100 per unit

Target Cost = Selling Price – Profit Margin ($400 – $100)

Target Cost = $300 per unit

If the estimated cost is greater than the targeted one, then repeat cost analysis, to reduce the estimated cost.

Actions to take / Dos

Actions to avoid / Don'ts

Communicate the need for target costing. Lead the change - leaders must champion the need. Provide target costing training to key functional people. Recruit functional target-costing champions to form a multidisciplinary target costing centre of excellence. Ensure all new product development projects are controlled by the target costing centre of excellence. Ensure all existing product variant development projects are controlled by the target costing centre of excellence. Provide the resources needed for success by the centre of excellence. Product developers must own costs - not just product quality and speed to market. Incentives must reflect this. Sales and marketing must accept the inevitability of trade-offs; endless variant development to satisfy customers' every need diminishes returns.

Don't make it the sole preserve of the management accountant. Avoid the project mindset - target costing is a process. Avoid cost being the only target. Target costing is about quality (from the customer's perspective), speed to market and cost - not just cost. Don't be subjective. Quality and value is what the customer says it is.