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Target Costing
- How does it work?
- Market research is undertaken to collect customer views
about the product
- Only those features that are of value to customers will be
included in the product design – value engineering
- A target selling price and target profit margin are set
- A target cost is calculated and any cost gap identified
- Strategies to reduce the cost gap are employed
- Market research is undertaken to collect customer views
about the product
- Cost Gap
- Estimated Cost - Target Cost = Cost Gap
- Any cost gap needs to be closed through product design and processing improvements
- The target cost is expected to be achieved by the time the product reaches maturity
- Value Engineering
- Attention should be
focused on reducing
the costs of features
perceived by the
customer not to add
value.
- Attention should be
focused on reducing
the costs of features
perceived by the
customer not to add
value.
- The target cost is expected to be achieved by the time the product reaches maturity
- Closing a cost gap
- 1) Can any materials be eliminated without reducing value to the customer e.g. Reduce packing
materials? 2) Can a cheaper material be substituted without affecting quality? 3) Can labour savings be
made without compromising quality e.g. using lower grade employees? 4) Can production volume be
increased to achieve economies of scale? 5) Can part-assembled components be bought in to save on
assembly time? 6) Can cost savings be made by reviewing the supply chain?
- 1) Can any materials be eliminated without reducing value to the customer e.g. Reduce packing
materials? 2) Can a cheaper material be substituted without affecting quality? 3) Can labour savings be
made without compromising quality e.g. using lower grade employees? 4) Can production volume be
increased to achieve economies of scale? 5) Can part-assembled components be bought in to save on
assembly time? 6) Can cost savings be made by reviewing the supply chain?
- Estimated Cost - Target Cost = Cost Gap
- Benefits
- 1) The business will have an early external focus to its
product development 2) Only those features that are of
value to customers will be included in the product
design 3) Cost control will begin much earlier in the
process if there is a cost gap 4) Costs per unit are often
lower under a TC environment which enhances
profitability 5) Can reduce the time taken to get the
product to market because TC has an early external
focus tending to get things right the first time
- 1) The business will have an early external focus to its
product development 2) Only those features that are of
value to customers will be included in the product
design 3) Cost control will begin much earlier in the
process if there is a cost gap 4) Costs per unit are often
lower under a TC environment which enhances
profitability 5) Can reduce the time taken to get the
product to market because TC has an early external
focus tending to get things right the first time
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