Steps In Target Costing

Steps In Target Costing

1. Step 1 - Determine a product specification of which an adequate sales volume is estimated.

   • A product is developed that is need and demanded by the customers in the market and therefore which should attarct more sales volumes

2. Step 2 - Set a selling price at which the organization will be able to achieve a desired market share.The price is fixed looking into the perceptions of the customers and Competitor Price

3. Step 3 - Estimate the required profit based on return on sales or return on investment.

4. Step 4 - Calculate the target cost = target selling price – target profit.

5. Step 5 - Compile an estimated cost for the product based on the anticipated design specification and current cost levels.

6. Step 6 - Calculate target cost gap = estimated cost – target cost.

7. Step 7 - Make efforts to close the gap.

   • "A ANALYSIS HAVE TO BE MADE PRIOR TO THE PRODUCTION PROCESS TO DESIGN OUT COSTS RATHER THAN CONTROL OUT COST DURING THE ACTUAL PRODUCTION"
   • TECHNIQUES SUCH AS VALUE ENGINEERING MAY BE PERFORMED ,WHICH LOOKS AT EVERY ASPECT OF THE VALUE CHAIN BUSINESS FUNCTIONS ,WITH AN OBJECTIVE OF COST CONTROL COUPLED WITH CUSTOMER SATISFACTION.
     • Value Engineering
       • A systematic and organized approach to provide the necessary functions in a project at the lowest cost. Value engineering promotes the substitution of materials and methods with less expensive alternatives, without sacrificing functionality or quality of the product. It is focused solely on the functions of various components and materials, rather than their physical attributes. Also called value analysis.
         • The concept of value engineering evolved in the 1940's at General Electric, in the midst of World War II. Due to the war, purchase engineer Lawrence Miles and others sought substitutes for materials and components, since there was a chronic shortage of them. These substitutes were often found to reduce costs and provided equal or better performance.

8. Step 8 - Negotiate with the customer before making the decision about whether to go ahead with the project.