Question

what is target costing? usefulness/ implications

Answer 1

Answer:

Target costing

Target costing is a system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve for a new product. If the company unable to achieve that target cost, the company does value analysis to modify the design to achieve the target price. Target costing is about having in mind already about the cost of the product, and produce according to that to the requirement of the stiff competition.

Target Costing is a very useful tool to become relevant in the market by doing a cost analysis of the competitor product and reduce the cost level at the same or bellow level to attract customers. However, sometimes it is used to make the product relevant to the market.

Usefulness/Implication of Target Costing

Target costing is a reverse process where companies compare the potential intended benefits of a product or solution with the optimal market price.

1- Cost Optimization

Cost optimization means getting the best at the least cost. Target costing helps to reduce the product cost by doing reverse engineering and reducing the price at an acceptable level.

2- Maintain Profitability

     Target costing helps an organisation to maintain profitability in many situations; when there is new entrant in the market with least cost or low product specification to distort the price-sensitive brand then target costing helps to reduce the cost and maintain the same desired level of profit, with same best product at least cost.

3- Reduction in the development cycle

When value chain analysis happens, there is always a major reduction of non-quality or non-value addition deletion which has associated cost or development cycle. Reduction in cycle means a reduction in cost.

4- Process Improvement

Target costing helps in process improvement, process improvement means improving the product for the desired level of price. Process improvement in real sense cost-benefit analysis.

5- Market and customer-led, rather than business capability-led.