An Overview Of Target Costing
1
AN OVERVIEW OF TARGET COSTING
Introduction
Many managers often underestimate the power of target costing as a serious competitive tool. When general managers read the word “costing”, they naturally assume it is a topic for their finance or accounting staff. They miss the fact that target costing is really a systematic profit and cost management process.
What Is Target Costing?
CAM-I defines target costing as the maximum amount of cost that can be incurred on a product and still earn the required profit margin from that product. This is captured by the equation
Target Cost = Price – Profit
At first sight the equation appears to reverse the familiar cost plus price equal profit that many firms use. However, behind the inversion of the equation are two very powerful ideas; (1) market price and profit margins are exogenous variables beyond the control of an organization’s management; and (2) customer and financial markets drive cost planning and not the other way......
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Approximate Word Count: 1935
Approximate Pages: 8 (250 words per double-spaced page)
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