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It can be defined as “a structured approach to determining the cost at which a proposed product with specified functionality and quality must be produced, to generate a desired level of profitability at its anticipated selling price”. It is an important part of a comprehensive management process aimed at helping an organization to survive in an increasingly competitive environment. In this sense the term “target costing” is a misnomer:
Features of Target Costing System
1. Target costing is viewed as an integral part of the design and introduction of new products
2. For any given product, a target selling price is determined using various sales forecasting techniques.
3. Integral to setting the target selling price is the establishment of target production volumes, given the relationship between price and volume.
4. The next stage of the target costing process is to determine cost reduction targets.
5. It should be noted that a fair degree of judgement is needed where the allowable cost and the target cost differ.
6. The total target is broken down into its various components, each component is studied and opportunities for cost reductions are identified. These activities are often referred to as value engineering (VE) and value analysis (VA).
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