Tuesday, January 19, 2010

Target Costing

Target Costing
Target Costing is a disciplined process that uses data and information in a logical series of steps to determine and achieve a target cost for the product. In addition, the price and cost are for specified product functionality, which is determined from understanding the needs of the customer and the willingness of the customer to pay for each function.
Another interesting aspect of Target Costing is its inherent recognition that there are important variables in the process that are essentially beyond the control of the design group or even the company. For example, the marketplace determines the selling price -- the global collection of customers, competitors and the general economic conditions at the time the product is being sold. The desired profit is another variable that is beyond the control of the design organization. It may be set at the corporate level. It is influenced by the expectation of the stockholders and the financial markets. And, the desired profit is benchmarked against others in the same industry and against all businesses. In this complicated environment, it is the role of Target Costing to balance these external variables and help develop a product at a cost that is within the constraints imposed. In short, traditional approaches, such as simple “cost-plus” is a recipe for market failure, and giving the customers more than they are willing to pay for is a recipe for insolvency.

The Basic Process: The figure below shows at a high level the basic stages in the Target-Costing process:

The stages are market-driven: