What is Target Costing?
Target costing is getting importance during the period of difficult market conditions. There is a ever changing of market conditions for any product. Therefore, the manufacturing companies are very eager to withstand in the business world by encountering the tough market conditions.
During 1960’s, there is a difficult market conditions in Japan. Even though, they are experiencing shortage of various resources and skills needed for the development of new concepts, tools and techniques. In this context, target costing, which is a new tool of management, has emerged and widely practiced in more than 80% of assembly industries and 60% of processing industries. This new concept is developed in win the competitors by maintaining good quality at lower cost with maximum productivity.
Meaning of Target Cost
Target cost means an estimation of total cost to win in the competition in terms of quality, cost and productivity. It is not a method or technique of costing. But, it is a management technique used to survive under the increasing competitive environment.
Features of Target Costing
The main features of target costing are presented below.
1. It is a part of management process used for the cost reduction and cost management.
2. It gives much importance to customers views, market conditions and profitability.
3. It is considered as an integral part of product design and introduction of new product.
4. It emphasized the earning of at least target profit margin from each product at any cost.
5. Under the target costing process, the target selling price is fixed on the basis of various sales forecasting techniques.
6. The fixing of selling price is based on the fixing of target production volumes since there is a relationship between price and volume.
7. The required profit margin is included in the target selling price.
8. The product design specifications, quality and the customers requirements and expectations are taken into consideration while fixing target selling price.
9. The difference between the target selling price and required profit margin is the target cost.
10. The cost reduction programme is followed on the basis of the components of current cost of the product. The current cost is based on existing technologies.
11. The difference between current cost and target cost is the level of cost reduction.
12. Target cost is divided into various parts. Each part is properly studied for finding the opportunities connected with to know the extent of cost reduction possibilities.
13. The studying of each part is known as value engineering (VE) and value analysis (VA).
14. A team is constituted to integrate the activities like marketing, engineering, manufacturing purchasing and finance in order to achieve the objectives of target costing.