Target costing

Last updated: 29.03.2016

Target costing is a costing method used to calculate product costs by deducting desired profit margin from market price of the product / service. 

The procedure of setting the costs is thus reversed to cost-plus pricing. 

Target costing is used as a means of cost reduction/optimization method.

 

Basic steps in Target costing:

  • Estimate competitive sales price
  • Setting of the desired and reasonable profit margin
  • Calculate target costs = estimated selling price less desired profit margin
  • Ascertain the actual costs of the product
  • Calculate cost gap = difference between actual and target costs
  • Try to eliminate (or reduce) the cost gap

 

 

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