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Target costing can have a startlingly large positive impact on profitability, depending on the commitment of management to its use, the constant involvement of cost accountants in all phases of a product’s life cycle, and the type of strategy a company follows.
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; also, the management team is completely aware of costing issues since it receives regular reports from the cost accounting members of all design teams.
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. This is opposed to the more common cost-plus approach under which a company builds a product, determines its cost, tacks on a profit and then does not understand why its resoundingly high price does not attract buyers. Thus, target costing results not only in better cost control but also in better price control.
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