Benefits Of Target Costing

Benefits Of Target Costing

1. Early External Focus

   • The organisation will have an early external focus to its product development. Businesses have to compete with others (competitors) and an early consideration of this will tend to make them more successful.
     • Traditional approaches (by calculating the cost and then adding a margin to get a selling price) are often far too internally driven.

2. Focuses on Values

   • Only those features that are of value to customers will be included in the product design.
     • Target costing at an early stage considers carefully the product that is intended. Features that are unlikely to be valued by the customer will be excluded. This is often insufficiently considered in cost plus methodologies.

3. Early Cost Control

   • Cost control will begin much earlier in the process. If it is clear at the design stage that a cost gap exists then more can be done to close it by the design team.
     • Traditionally, cost control takes place at the ‘cost incurring’ stage, which is often far too late to make a significant impact on a product that is too expensive to make.

4. More Cost Reduction

   • Costs per unit are often lower under a target costing environment. This enhances profitability. Target costing has been shown to reduce product cost by between 20% and 40% depending on product and market conditions.
     • In traditional cost plus systems an organisation may not be fully aware of the constraints in the external environment until after the production has started.
       • Cost reduction at this point is much more difficult as many of the costs are ‘designed in’ to the product.

5. Reduced Time for Product Introduction

   • It is often argued that target costing reduces the time taken to get a product to market. Under traditional methodologies there are often lengthy delays while a team goes ‘back to the drawing board’.
     • Target costing, because it has an early external focus, tends to help get things right first time and this reduces the time to market.