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Target cost is the difference between estimated selling price of a proposed product with specified functionality and quality and the target margin. This is a cost management technique that aims to produce and sell products that will ensure the target margin. It is an integral part of the product design.
While designing the product, the company needs to understand what value target customers will assign to different attributes and different aspects of quality. This requires use of techniques like value engineering and value analysis. Intensive marketing research is required to understand customer preferences and the value they assign to each attribute and quality parameter. This insight is required to be developed must before the product is introduced.
The company plays within the space between the maximum attributes and quality that the company can offer and the minimum acceptable to target customers. Therefore in absence of intensive marketing research, the target costing technique cannot be used effectively.
In fact, target costing may assist control of costs and pricing of product as under:
(i) Target costing considers the price that ought to be charged by a company to achieve a given market share.
(ii) Target costing should take life cycle costs in to consideration.
(iii) If there is a gap between the target cost and expected cost, ways and means of reducing or eliminating it can be explored.
(iv) The target cost may be used for controlling costs by comparison.
(i) Target costing considers the price that ought to be charged by a company to achieve a given market share.
(ii) Target costing should take life cycle costs in to consideration.
(iii) If there is a gap between the target cost and expected cost, ways and means of reducing or eliminating it can be explored.
(iv) The target cost may be used for controlling costs by comparison.
