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What is the Target Cost? Target Cost refers to the total cost of the product after deducting a certain percentage of profit from the selling price. It is mathematically expressed as the expected selling price – desired profit required to survive in the business.
If the company’s intended profit margin is 10% on the selling price, calculate the target cost per unit. Solution Target Profit Margin = 10% of 20 = $2 per unit
Target costing is the method which company sets the production cost by deducting profit margin from the target selling price. Company uses this strategy by setting the selling price, determine desirable profit, and calculate the target cost. Target Cost is the remaining balance after deducting profit from selling price.
Target cost per unit = $2 * (1 – 15%) = $1.70. by Obaidullah Jan, ACA, CFA and last modified on Apr 23, 2019. Target costing is a cost accounting approach in which companies set targets for costs based on the price prevalent in the market and the profit margin they want to earn.
Attention to all costs will help to reduce the cost per unit and will help an organisation achieve its target cost. Many costs will be linked. For example, more attention to design can reduce manufacturing and warranty costs.
Target costing enables organisations to exercise cost management early in the product design and development cycle. It allows them to set a price point for a product or service that aligns with customer, competitor and market research.
In this article, we discuss what target costing is, the benefits of using it, and how to perform it, as well as provide tips and an example of using target costing for your product or service.