Advantages And Disadvantages Of Target Costing

Target costing

A cross functional team of marketing experts, engineers and cost accountants determine the cost of a product early in the design and development phase based on what customers desire in a product and what they are willing to pay for the new product. Implementing this market oriented approach enables firms to set the desired profit margin early if not prior to the product development process. Two methods are used to set target cost: subtractive, addition. Subtractive is the method of determining the sales price and subtracting the desired margin to arrive at the target cost. Addition is the method used when the sum of all cost plus the desired margin provide the firm the target cost. Target costing is often subdivided into

Constraints could be a simple as lack of manpower to perform a function or slow delivery times from a supplier. The process of mapping the system, identifying constraints, bottlenecks, non-bottlenecks (capacity greater than demand), and capacity-constrained resources are all important to improving the operation and increasing profits. Identifying the additional resources needed the excess resources that currently exist will provide invaluable information that will aid the future budget and forecast for a firm. A weakness of TOC is that it focuses on processes that are constrained and ignores the rest of the processes. Six Sigma is a more comprehensive continuous improvement approach as it focuses on waste at every step of the

The US Government and construction industry often uses LCC to evaluate product and services. The product cost, operational cost, and maintenance cost are summed and the impact on the long-term budgets are evaluated during the source selection. Suppliers offering the lowest cost and best value products clearly have a competitive advantage. Costing methods that focus on production costs (like TOC) and costing methods that focus on market price (like target costing) are less useful in the government procurement world as market price is not well established and the items being produced are customized. Life-cycle costing systems evaluate costing from the research and development phase through to the eventual conclusion of a product 's life. This approach is useful in determining the overall product