Target costing In Strategic Cost Management

Target costing In Strategic Cost Management

Description/Paper Instructions

Target costing In Strategic Cost Management

Target costing is a strategic cost management technique used by businesses to determine the maximum cost they can incur for a product or service while still earning a desired profit margin. It is a proactive approach that focuses on cost management during the product development and design phase, rather than reacting to costs after the product is already in production. Target costing involves setting a target cost based on the market price and the desired profit margin, and then working backwards to determine the allowable costs for various components and activities.

The target costing process begins with market research and analysis to identify customer needs and preferences, as well as competitive pricing and profit expectations. This information is used to determine the target selling price for the product or service. The desired profit margin is then subtracted from the target selling price to arrive at the target cost.

Once the target cost is determined, it is compared to the estimated costs for the various components and activities involved in producing the product. Any costs that exceed the target cost are considered “overcosts” and must be reduced or eliminated. This requires a detailed analysis of the cost structure and value chain of the product, including the costs of materials, labor, overhead, and other resources.

To achieve the target cost, cross-functional teams are formed, involving members from various departments such as engineering, manufacturing, purchasing, and finance. These teams collaborate to identify cost reduction opportunities and innovative solutions that can help meet the target cost without compromising product quality or customer satisfaction.

One of the key principles of target costing is the “design to cost” approach. This means that cost considerations are integrated into the product design process from the beginning. Designers and engineers work closely with the cost management team to develop product specifications and features that can be produced within the target cost. This may involve value engineering, which focuses on maximizing the value of the product while minimizing costs.

Supplier collaboration is another important aspect of target costing. By involving suppliers early in the product development process, businesses can benefit from their expertise and negotiate better prices for materials and components. Supplier selection is based not only on price but also on the supplier’s ability to meet the target cost and provide quality products or services.

Throughout the target costing process, continuous monitoring and evaluation are essential. Actual costs are compared to the target cost, and any variances are analyzed to identify the causes and take corrective actions. This may involve further cost reduction efforts, process improvements, or changes in the product design.

Implementing target costing requires a cultural shift within an organization, as it requires a strong commitment to cost management and collaboration across departments. It also requires accurate cost data and effective cost tracking systems to monitor progress and make informed decisions.

The benefits of target costing are numerous. It helps businesses align their costs with market demands and customer expectations, enabling them to offer competitive prices while maintaining profitability. By involving cross-functional teams and suppliers, it fosters collaboration and innovation, leading to improved product quality and efficiency. Target costing also encourages cost consciousness throughout the organization, driving a culture of continuous improvement.

In conclusion, target costing is a strategic cost management technique that enables businesses to set a target cost based on market price and profit expectations, and then work towards achieving that cost during the product development and design phase. By integrating cost considerations into the product development process, involving cross-functional teams and suppliers, and continuously monitoring costs, businesses can optimize their costs while delivering value to customers and maintaining profitability. Target costing is a powerful tool that helps businesses stay competitive in today’s dynamic and cost-conscious marketplace.

Target costing In Strategic Cost Management

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