Target Costing

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INTRODUCTION OF TARGET COSTING Target costing is a system of profit planning and cost management. The required features and performance of the proposed product are established. Then target costing determines the life cycle cost at which the product must be produced, to generate the firm’s desired level of profit. Given the product’s anticipated selling price (Cooper and Slagmulder,1999, p.166). Note that target costing is not a method for product costing , it is a technique for cost management. It was devised in Japan, where it is used widely, particularly in automobile, electrical and equipment-manufacturing industries (Lorino, 1995). With the effect of globalization, it is gradually gaining acceptance in the Western world. EXAMPLE OF…show more content…
Under target costing, all functions of the business must make a firm commitment to designing, producing and distributing the product with total life cycle costs equal to the target cost. Technique such as value engineering can be used to find creative ways of achieving some of these targets. Value engineering (VE) involves analyzing the design of the product and the production process to eliminate any non-value-added elements, in order to achieve the target cost while maintaining or increasing customer value. Value engineering may involve design engineers modifying the design of some components to make them easier to manufacture and maintain, substituting more cost-effective material which does not reduce customer value, and improving the efficiency of production process. Thus, in undertaking VE, it is critical that engineers and product designers have clear understanding of customer value. Value engineering will also involve working with suppliers to provide components or raw materials that meet target costs. ADVANTAGES OF TARGET COSTING 1. To reduce costs before they are locked in As previously mentioned, it is being increasingly recognised that the major proportion of product costs, around 70 to 80% (Cooper and Chew, 1996) are effectively fixed during the design stage. Target costing provides a means to manage costs from the design stage to maximise the potential for cost reduction. 2. As an analysis which highlights other

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