Target Costing

Compared to traditional standard costing approaches in which an estimate of product, general administrative, marketing, and distribution costs is taken into consideration, target costing takes on a more proactive approach to pricing. Traditional costing determines cost based on the design of goods, adds a markup and establishes a price. In comparison, the marketplace directs target costing by first setting a selling price, then subtracting target income and finally reaching a cost.

Traditionally, a cost figure is obtained, implemented and once found to be poorly configured, sent back to management and engineers for reworking of production processes and cutting of costs. In comparison, target costing utilizes costing information and focuses on the best possible price up front, preventing wasted time on after-the-fact discussions concerning design and re-engineering of the product.

The decision making process involves a cross functional team, in which employees from various departments (Production, Engineering, R&D, Marketing, and Accounting) are given the responsibility of determining an acceptable market price and corresponding Return on Sales, as well as a feasible cost in which a given item may be produced. In order to minimize costs, team members focus on eliminating non-value-added costs of the process, improving product design and modifying process methods.

Target costing, in particular, emphasizes the reduction of costs during the planning and design stage of the product life cycle since the majority of product cost is determined at this stage. In comparison to traditional product costing methods, target costing allocates more of the total cost to the development stage, simultaneously reducing costs during the production stage. A number of cost-engineering techniques are used in the cost reduction process. Just-in-Time, Total Quality Control, Material Requirements Planning and Value Engineering are among such methods promoted by target costing....