This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis, and service pricing. It is also hugely popular since organizations can develop a much better corporate focus and strategy if costs are better grasped.
Once an idea price point is established, you set an ideal profit margin. Your profit goals show the necessary cost basis, or target cost, you must achieve when developing the product. This is a common financial technique, and it can especially benefit small producers and resellers trying to compete in the marketplace.
Cost Optimization A primary advantage of target costing is that it allows you to analyze the best way to make or acquire products at the lowest costs.
Minimizing costs is a common financial goal of any small business, regardless of whether they offer high, medium or low prices.
Minimizing costs gives a small company financial flexibility to focus on achieving high profit margins or to enter the market at low price points to attract a large customer base.
Systematic Target costing is a much more formal and systematic way to focus on cost optimization than other less-formal approaches often used by small businesses.
It requires more time to go through a systematic approach like this, but the results are typically more fine tuned. Target costing involves consideration of all equipment, processes, labor and materials needed to make goods, or the costs to acquire goods and get them ready to sell to your customers.
Reduced Development Cycle A point of emphasis in reducing costs with target costing is minimizing product cycle time. This is the amount of time it takes from conception to market-ready product. A shorter cycle time is a competitive advantage as well, since you can present your product to the market sooner, perhaps as the first mover.
It takes into account both factors in profit: Many companies start by developing products and base pricing on costs. By starting with market pricing first, you help ensure that you end up with a product that has benefits and a price point customers will value. In essence, you achieve the optimal price-to-cost relationship possible for your products.
Target Costing About the Author Neil Kokemuller has been an active business, finance and education writer and content media website developer since He has been a college marketing professor since Kokemuller has additional professional experience in marketing, retail and small business.This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis, and service pricing.
It is also hugely popular since organizations can develop a much better corporate focus and strategy if costs are better grasped. TARGET COSTING AND ACTIVITY BASED COSTING.
TARGET COSTING Target costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum target cost figure.5/5(2). Target costing is a system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve for a new product.
If it cannot manufacture a product at these planned levels, then it cancels the design project entirely. With target costing, a management te. Target costing is an approach in which companies set targets for its costs based on the price prevalent in the market and the profit margin they want to earn.
Keeping its costs below the relevant targets helps the company generate profit. Target costing is a reverse process where companies compare the potential intended benefits of a product or solution with the optimal market price.
Once an idea price point is established, you set. Activity-based costing is a system that tallies the costs of overhead activities and assigns those costs to products. This costing system is used in target costing, product costing.