Marketing91

  • HOME
  • Categories
    • Marketing Management
      • Marketing basics
      • Marketing Articles
      • Careers in Marketing
      • Market Research
      • Retail Marketing
      • Services Marketing
    • Strategy
      • Marketing Strategies
    • Management
    • Branding
    • Small Business
    • Sales & Selling
    • Advertising
  • Online Marketing
    • Blogging
    • Social Media Marketing
    • Search Engine Optimization
    • Internet Marketing
    • Ecommerce
  • Brands
    • Marketing Mix of all Brands
    • SWOT of Brands
    • Brand Competitors
    • Marketing Strategy of Brands
    • Business Models of Brands
  • Videos
Home » Sales management articles » Target Costing: Meaning, Steps Involved, Objectives, and Advantages

Target Costing: Meaning, Steps Involved, Objectives, and Advantages

October 18, 2019 By Hitesh Bhasin Tagged With: Sales management articles

Target costing is defined as a management technique that helps the company to decide the prices by estimating market condition.  It includes cost planning in the initial designing stage and also the cost control that exists throughout the lifecycle of a product.

Although the primary role of target costing is not to surpass target cost, it does not remove its focus which is not to decrease costs but to achieve cost reduction by process of target costing.

What is Target Costing

Table of Contents

  • Meaning
  • Understanding target costing
  • Process of target costing
  • Examples of target costing
  • 10 Features of target costing
  • Objectives of target costing
  • Advantages of target costing
  • Disadvantages of target costing
  • Steps involved in target costing
    • 1. Market research
    • 2. Identifying the market
    • 3. Product features
    • 4. Product design
    • 5. Determine cost, margin, and price
    • 6. Value engineering process
    • 7. Improve designs
    • 8. Formal approval
    • 9. Maintaining accounts
    • 10. Implementing target costing
    • Related posts:

Meaning

Target cost is an accounting approach that measures the cost of a product that is necessary to develop a certain quality and functionality for ensuring the desired profit figure.

This cost management tool is used by the company through design, research, engineering, production, and marketing to reap better profits in this competitive market.

Understanding target costing

Understanding target costing

The costs are planned in the early phase of a new product by understanding the market thoroughly. It intends to satisfy the growing needs and requirements of a consumer about price, features, and quality of a product.

Target costing is estimated as the expected selling price of a product minus the desired profit from selling the product. A target cost is the highest amount of cost that the product incurs but the beauty of it is that the product can still manage to earn a profit at a specific selling price.

It is easy to break the target cost from the product to the component level with the help of target costing. This will spread the competitive pressure to the suppliers and designers instead of just the business entity.

The objective of target costing is to help the organization in cost reduction, management, and planning at the initial designing stage rather than at the later stage of production and development.

Process of target costing

  • Identifying customer needs
  • Planning selling price as per the needs
  • Identifying the target cost
  • Keep the price in consideration after identifying suppliers and fixing the manufacturing process
  • Compare sample product with the target and start production for product launch
Also Read  What is Sales Prospecting & its role in Sales?

Examples of target costing

Target costing can be explained with the help of a simple example. Armstrong needed a customized bicycle, and he approached one of his favorite manufacturers David for it. After noting down the exact specifications of his client, David now has to quote the selling price.

He looks at the order and first determines the cost that will be needed to manufacture the bicycle and then at what price he can sell it. It now becomes easy for him to determine the estimated profit on the product.

The actual formula for target cost is expected selling price minus the desired profit. Suppose the first is 100,000 Rs and the second is Rs 10,000. Now it becomes easier to get the target cost that is

Target cost = desired selling price – expected profit

Target cost = 100000 – 10000

Target cost = 90,000

If David thinks that the desired profit is not enough, he can either increase the selling price or try to minimize the cost.

10 Features of target costing

Features of target costing

The important features are as follows-

  1. The organization is not a price maker instead is defined as the price taker as it is the market conditions that determine the product prices, not just the company alone. It has to make several changes as per the prevalent conditions then.
  2. When the company estimates the selling price, it always figures in expectation of its customers, specification and product design
  3. The target selling price was estimated based on sales forecasting method
  4. Target costing is an important strategy adopted by the business entity for putting their onus on cost management and cost reduction.
  5. The onus was on earning the least amount of target profit at any cost from every product
  6. The organization always include the minimum amount of profit in the target selling price
  7. The management wants to achieve cost reduction with the help of target costing
  8. The management keeps a team handy to include factors like marketing, manufacturing, and purchasing to achieve the desired target cost.
  9. It is considered an important part of the design and launch of a new product
  10. The level of cost reduction was estimated as the difference between current and target cost

Objectives of target costing

The objectives of target costing are-

  • Decreasing the costs to ensure the required profit level of new products
  • Meeting the set standards of the market for new products in terms of price, delivery time and quality levels
  • Motivating employees to achieve target profit during the development of new products
Also Read  Customer Persona - Meaning & Best Tips Develop a Customer Persona

Advantages of target costing

Advantages of target costing

The advantages of target costing are described below-

  1. Helps to utilize the fresh opportunities in the market so that it can convert it into savings.
  2. It strengthens manufacturing strategies
  3. Reduces the cost of products to significant numbers
  4. Molds the management’s approach of manufacturing and designing into the market-driven move.
  5. The target costing is a powerful tool that is capable of improving the operations of a business entity and creating further economies of scale.
  6. Helps to give more value to the customer, and this encourages customer loyalty towards the brand
  7. It makes sure about the planning and schedule of production and marketing
  8. Target costing encourages employee participation and commitment to quality production
  9. It encourages innovation of product to gain competitive advantages
  10. Helps the management to find new opportunities
  11. Minimizes the period of the development cycle of a product

Disadvantages of target costing

The disadvantages are as follows-

  1. The process of development becomes very long as the designing team makes several alterations that meet the target cost
  2. Cutting costs can affect the employee’s morale
  3. It becomes difficult to reach a consensus as numerous players are involved in the decision making
  4. If the estimated cost is low, it creates an unnecessary burden on the production team
  5. Sometimes an organization chose to opt for inferior quality and design to achieve required target costing
  6. Mistakes in target costing can lead to financial loss for the company

Steps involved in target costing

Steps involved

The following steps are involved in target costing

1. Market research

The organization conducts market research to understand and determine the wants of a customer. This helps in making viable changes in the existing product as well as in designing new products about the perceptions and expectations of the customer

2. Identifying the market

The information collected via market research proves a blessing for the business entity. It informs about the types of products prevalent in the market, level of competition it can face, number of rival companies that it will have to handle and the prices at which the products are already available in the market.

It is also vital to get an estimate of the amount which a customer considers affordable pricing so that it can make its adjustments.

Also Read  5 Evergreen sources of prospects

3. Product features

Gaining information about the preference of a customer is a tedious process as their wants and needs may vary from one to another. The organization takes into account the average requirement and converts them into a tangible entity called a product.

Now it needs target costing to follow the needed path for its growth and prosperity

4. Product design

The organization designs a product that it considers suitable for the prevalent market conditions by analyzing needs of the customer, prevalent marker forces, models adopted by rival companies, relevant technology, process capabilities, design alternatives, and service requirements.

5. Determine cost, margin, and price

It is the market survey that determines the target selling price of a product. The business entities also add standard margin in the target selling price.

6. Value engineering process

Carry out a value engineering process if you are interested in reaching the target cost.

7. Improve designs

The organization can conduct a trial production in small scale to ensure target profit margin, target cost, and product performances. It ends when you find the match between target cost and product design.

8. Formal approval

The top management receives a detailed report about the design of a particular product, costs to be incurred, and elements of cost and production process for a formal approval so that the company can say yes to commercial production.

9. Maintaining accounts

It is vital to maintain separate accounts for each product design so that you can verify whether total expenses exceed the target cost for any product.

10. Implementing target costing

The organization acquires the necessary information in relation to the expenses that have incurred for every design and that too separately. It keeps a close watch so that it can nudge the total cost within the target cost.

Related posts:

Shadow PricingShadow Pricing: Meaning, Examples, Advantages, Uses, and Limitations Sales BrokerSales Broker: Role, Advantages and Disadvantages Explained Price RebatePrice Rebate: Definition, Meaning, Examples and Strategies ways to sell a productWays To Sell A Product – Top 10 Ways To Sell A Product What is point of contactFree On Board: Meaning, Advantages Of Free On Board Contract Sales Target - 3What is Sales Target? Types of Sales targets What is Quantity DiscountWhat is Quantity Discount? Merits of Quantity Discount Safety StockSafety Stock: Definition, Examples, Disadvantages and How to Calculate it? Defining the Term Unit PriceUnit Price – Definition, Examples and Calculations Buffer StockBuffer Stock: Meaning, Methods and Examples
Also Read  What is Sales Enablement? Process of Sales Enablement

All Knowledge Banks (Hub Pages)

  1. Marketing Hub
  2. Management Hub
  3. Marketing Strategy
  4. Advertising Hub
  5. Branding Hub
  6. Market Research
  7. Small Business Marketing
  8. Sales and Selling
  9. Marketing Careers
  10. Customer Management
  11. Top 10 Lists
  1. Internet Marketing
  2. Blogging
  3. Search Engine optimization
  4. E-commerce
  5. Facebook Marketing
  6. Social Media Marketing
  7. Business Model of Brands
  8. Marketing Mix of Brands
  9. Brand Competitors
  10. Strategy of Brands
  11. SWOT of Brands
GET DAILY MARKETING UPDATES

About Hitesh Bhasin

I love writing about the latest in marketing & advertising. I am a serial entrepreneur & I created Marketing91 because i wanted my readers to stay ahead in this hectic business world. You can follow me on Facebook. Let's stay in touch :)

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Recent Posts
  • What is Benefits Administration? Definition and Steps
  • What is coaching? Different coaching styles
  • What is Corporate Training? Types and benefits
Advertisement

Marketing91

MORE INFO

  • About Marketing91
  • Privacy Policy
  • Cookie Policy
  • Disclaimer
  • Terms of Use
  • Advertise
  • Contact us
  • Sitemap
  • ISO 9001:2015 Certified

LEARN WITH US

  • Course on Market Segmentation
  • Course on Marketing Strategory Models

WE WRITE ON

  • Marketing
  • Small Business
  • Management
  • Internet Marketing
[email protected]

Copyright © 2020 Marketing91 All Rights Reserved