Steps involved in Target Costing process
The following are the main steps or stages involved in the target costing process.
1. Conducting Market Research: The company should determine the customer wants precisely through conducting marketing research. A new product can be designed or make changes in the existing product on the basis of the customers expectations and perceptions.
2. Identify the Nature of Market: The market information can be collected in such a way that what type of products are available in the market, the level of competition prevailing, the number of competitors and the price at which the existing products are available. Besides, the company should find out the affordable price of the customers. If so, the target costing is followed.
3. Translation of Customers Requirements into Product Features: The preference of one customer differs from another. These preferences are collectively called as customers requirements. Now, the bundle of preferences are bringing into a tangible thing i.e. product.
4. Development of a Product Design: By considering the engineering analysis of market forces, customer needs, relevant technology, competitors models, product configuration and performance features, design alternatives, process capabilities, maintenance and service requirements etc., a suitable product design is to be determined by the company. Such a product design assures a targeted profit and target cost for each component in total.
5. Determine the Price, Margin and Cost: Target selling price is determined on the basis of market survey, at which the product can be sold. The standard margin is also included in the target selling price. If so, it is possible to determine the target cost
Target Cost = Target Selling Price – Target Profit
6. Conducting Value Engineering Process: The company can conduct value engineering process to reach target cost. It is a well known fact that the difference between target selling price and the target profit is target cost. The target selling price cannot be changed at any cost; Hence, it is a duty on the part of company is that takes necessary steps to reach the target cost.
7. Improve the Design to Reach Target Cost: The company starts a minor trial production. Such a production ensures all product performances, target cost and target profit margin also. The trial production comes to an end whenever the product design matches the target cost.
8. Approval of Top Management: A detail report is presented before the top management for getting approval. The report contains the production process, elements of cost involved with the level of costs to be incurred and design of the specified product. A formal approval is given for starting commercial production.
9. Maintenance of Accounts: A separate accounting records are to be maintained for each product design. It is possible to verify whether the total expenses exceed the target cost. If the expenses are not controllable at any time, the product design will be changed. Hence, the maintenance of separate set of books are highly required under target costing process.
10. Implement the Target Costing: The company can get the information regarding the expenses incurred for each design separately. A continuous watching is essential to bring the total cost within the target cost.
Advantages of Target Costing
The main advantages of target costing are discussed below.
1. It ensures proper planning of production schedule and even marketing also.
2. The company can win in the competition from the marketing world.
3. The customers can get quality products by fulfilling their requirements at affordable cost.
4. There is a commitment on the part of employees from top to bottom for quality production.
5. There is a possibility of product innovation to achieve some competitive advantages.
6. It uses management control system to support and reinforce manufacturing strategies.
7. It integrates the activities of supplier with the customers requirements to design the right product.
8. It helps to find the market opportunities. Such market opportunities are used to fix the possible target selling price at the maximum.
9. The cost of features of a product is based on the customers’ willingness to pay for them.
10. It reduces the period of product development cycle.
11. It reduces the costs of products significantly.
12. The spirit of team work starts from the stage of conceiving the product idea and ends with distribution of products among the customers and passes through planning, developing, manufacturing and selling.