TARGET COSTING
Introduction to Target Costing
It is a customer-centric costing system that bases all cost workings for a product from its
market price.
The purpose is t0 reduce cost of a product as low as possible to arrive at a price that
would be either equal to or less than that of competitors product while delivering the same
functionality.
Objectives of Target Costing
Reducing the cost of the product equal to that of competitors’ product at design stage to
enable the company to stay competitive in the market in terms of price and product
features.
It is a market driven costing system to develop a product that is primarily and effectively
used for cost planning and controlling at allowable levels throughout the lifecycle of the
product.
Applicability of Target Costing
Target costing is the most effective system for planning, controlling and monitoring of
cost of new products at each stage of their life cycle.
However, it can also be used for existing stream of products.
It is noted through studies that 70% to 80% cost is planned and committed at design
stages.
If all focus is placed on cost-cutting at design stages then cost is managed according to the
plans efficiently and effectively.
Committed costs
It refers to the costs that management agrees to incur for product development through all
stages of life.
About 70% to 80% of manufacturing cost is committed at design stages of the product.
Target Costing focuses all attention at cost components (materials, labour and overheads)
at design stages.
Example – it is decided at the product design stages of what type of materials are to be
used and from where they can be procured. What are the alternatives available for those
materials in the market? How many suppliers for the material are available in the market?
Cost Accumulation
Cost of a product is accumulated at different stages in the lifecycle of a product. A
lifecycle of a product starts from the concept stage and ends with recycling or
decomposing of the product.
Design stage – Concept development, design, tooling, proto-types.
Manufacture – direct cost of materials, labour and indirect costs.
Operations – warehousing, distribution, selling, admin, logistics, loading and unloading
costs, taxes, advertising etc.
End/retire – recycling, disposal cost, decomposing costs.
Lifecycle costing
Lifecycle Costing (LCC) refers to a process of identifying and recording all costs that are
incurred over the entire lifecycle of a product.
LCC includes cost incurred before production of the product till cost incurred for disposal
of the product.
Target Costing attempts to achieve reduction of LC costs of a new product by examining
all stages for cost reduction and R&D, production and disposal stage of a product.
Kaizen costing
It refers to a process of cost improvement through small incremental amounts rather than
through large innovations.
Kaizen costing continues throughout the manufacturing process.
In Target Costing, the main purpose is to achieve target cost over the lifecycle of the
product.
After the design is finalized, the production starts and Kaizen costing focuses on
eliminating costs during production processes.
KC achieves this by reducing unnecessary cost during manufacturing processes.
Kaizen Costing
Every employee is required to produce cost efficiencies in production processes.
KC goals for cost reduction are given to each employee on monthly or yearly basis.
Actual results are compared with KC goals.
The actual results achieved are made base for new KC goals for each employee.
In this way, KC continuously improves cost at production stage.