Implication Of Using Target Costing

Target costing requires managers to change the way they think about the relationship between cost, price and profit.
a) Traditionally the approach is to develop a product, determine the production cost of that product, set a selling price, with a resulting price, with a resulting profit and loss.
b) The target costing approach is to develop a product, determine the market selling price and desired profit margin, with a resulting cost which must be achieved.

With target costing there is a focus on:
a) Price-led costing.
b) Customers. Customer requirements for quality, cost and time are incorporated into product and process decisions. The value of product features to the customers must be greater than the cost of providing them.
c) Design. Cost control is emphasized at the design stage so any engineering changes must happen before production starts.
d) Faster to market. The early external focus enables the business to get the process right first time and avoids the need to go back and change aspects of the design and/or production process.The then reduces the time taken to get a product to the market.