Taking a products market price as given and

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Taking a product’s market price as given and determining the maximum cost the company can spend to make the product and still achieve the desired profitability Management must predict both the cost to produce the product and the price at which it will sell
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Target Costing Based on the product’s predicted price and the company’s desired profit, managers set a desired or target cost before creating or even designing the product Managers must then design the product and manufacturing process so that the product’s cost does not exceed its target cost.
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Target Costing The target costing for a product is calculated by starting with the product's anticipated selling price and then deducting the desired profit. Formula or equation further explains this concept: [Target Cost = Anticipated selling price Desired profit] The product development team is then given the responsibility of designing the product so that it can be made for no more than the target cost.
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Traditional Cost Management Approach Product Requirements Product Design Process Design and Cost Estimate Make / Buy Analysis Supplier Cost Estimate Production Periodic Cost Reduction Cost Too High
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Target Cost Analysis Price (Set By Market) Gross Margin (Set by Management) Target Product Cost (Price Gross Margin Part A Part B Part C Direct Labor Indirect Cost 1 Indirect Cost 2 Indirect Cost 3 Indirect Cost 4 Activity Based Management (During All stages of Product Life) Kaizen Costing (During Production) Value Engineering (During Design and Development Part A Part C Direct Labor Indirect Cost 2 Indirect Cost 3 Indirect Cost 4 Cost Reduction Methods Target Cost Structure Existing Cost Structure
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Target Costing Management Market research determines the price at which a new product will sell. Management computes a manufacturing cost that will provide an acceptable profit margin. Engineers and cost analysts design a product that can be made for the allowable cost.
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Chapter End What is the right price?
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  • Fall '19
  • Cordell Company

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