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The statement, “When target costing is used to determine the selling price of a product, a target profit per unit is added to the actual unit cost to determine the selling price,” is incorrect.
When target cost is used to determine the selling price of a product, management estimates what a new product’s market price is likely to be based on its anticipated features and prices of products already on the market. The desired profit is subtracted from the estimated market price to arrive at the product’s target cost. The design and development team is then given the responsibility of ensuring that the actual cost of the product does not exceed that target cost.
When target cost is used to determine the selling price of a product, management estimates what a new product’s market price is likely to be based on its anticipated features and prices of products already on the market. The desired profit is subtracted from the estimated market price to arrive at the product’s target cost. The design and development team is then given the responsibility of ensuring that the actual cost of the product does not exceed that target cost.
