Target Costing Essay

Target costing is a system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve for a new product. If it cannot manufacture a product at these planned levels, then it cancels the design project entirely. With target costing, a management team has a powerful tool for continually monitoring products from the moment they enter the design phase and onward throughout their product life cycles. It is considered one of the most important tools for achieving consistent profitability in a manufacturing environment.

The primary steps in the target costing process are:

Conduct research. The first step is to review the marketplace in which the company wants to sell products. The design team

Instead, management should review old projects at least once a year to see if the circumstances have changed sufficiently for them to possibly become viable again. A more precise review approach is to have each project team formulate a set of variables that should initiate a product review if a trigger point is reached (such as a decline in the price of a commodity that is used in the product design). If any of these trigger points are reached, the projects are immediately brought to the attention of management to see if they should be revived. Such a revival should take into consideration any changes in the market prices of comparable products since the project was last examined.

Target costing is most applicable to companies that compete by continually issuing a stream of new or upgraded products into the marketplace (such as consumer goods). For them, target costing is a key survival tool. Conversely, target costing is less necessary for those companies that have a small number of legacy products that require minimal updates, and for which long-term profitability is more closely associated with market penetration and geographical coverage (such as soft