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Target costing improves profitability in two ways.
1. It places such a detailed continuing emphasis on product costs throughout the life cycle of every product that it is unlikely that a company will experience runaway costs;
2. It improves profitability through precise targeting of the correct prices at which the company feels it can field a profitable product in the marketplace that will sell in a robust manner.
Most Useful Situations for Target Costing
Target costing is most useful in situations where the majority of product costs are locked in during the product design phase. This is the case for most manufactured products, but few services.
Target costing is most useful in situations where the majority of product costs are locked in during the product design phase. This is the case for most manufactured products, but few services.
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Problems with Target Costing
1. The development process can be lengthened to a considerable extent since the design team may require a number of design iterations before it can devise a sufficiently low-cost product that meets the target cost and margin criteria.
1. The development process can be lengthened to a considerable extent since the design team may require a number of design iterations before it can devise a sufficiently low-cost product that meets the target cost and margin criteria.
2. A large amount of mandatory cost cutting can result in finger-pointing in various parts of the company, especially if employees in one area feel they are being called on to provide a disproportionately large part of the savings.
3. Representatives from number of departments on the design team can sometimes make it more difficult to reach a consensus on the proper design
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