Target Costing
Target Costing as a Cost Leadership Strategy
This is a philosphy widely used in Japan. Target costing evolves from the belief that a product must have a target price to enable it to gain a target share of the market. In the long run, costs must come below the target price if the product is to be a beneficial and worthwhile manufacturing venture.
Product development and engineering departments work out the cost og a product tos ee of the organization can manufacture that product for the target cost. The long run cost must take into account learning curve factors. If the target cost cannot be met then the firm must seek to reduce the cost eg, by re-engineering, simpifying the products, or changing the reqauirements for resource input.
Target costing is beneficial and complements cost leadership strategy because it helps in the establishment of more efficient production methods, and it means that a manufacturer has to reassess his production strategies.
It has a major advantage of encouraging all departments within an organization to work together to consider all sides of a product’s cost ie, development, production and marketing and it can be used as a useful addition to life cycle product costing. In summary, target costing is the process of establishing what the cost of the product should be over its life cycle.