How can target costing help you make better decisions?

3 How to apply target costing?

Target costing involves four main steps: market analysis, target price setting, target cost setting, and cost management. To apply them in corporate accounting, begin by researching the target market and understanding customer needs and willingness to pay. Analyze competitors and their prices, features, and quality to determine your market position and differentiation strategy. Then set a realistic and competitive price that reflects your value proposition and customer expectations, considering your market share, demand, and price elasticity. Subtract your desired profit margin from the target price to get the target cost; this should be based on financial goals, risk, and return on investment, and should be lower than or equal to the estimated actual cost. Lastly, compare the target cost with the estimated actual cost to calculate the cost gap and identify cost drivers and opportunities for cost reduction or elimination. Implement the cost reduction actions and monitor results; adjust the target cost and price as needed.

4 What are the challenges of target costing?

Target costing can come with several challenges, such as resistance to change from those used to traditional methods, or trade-offs between cost and quality, performance, or functionality. Additionally, there is uncertainty surrounding the accuracy and reliability of market analysis, cost estimation, and cost reduction techniques. This requires flexibility and responsiveness to changes and customer feedback. All of these issues necessitate a cultural shift and commitment from all levels of the organization in order to be successful.

5 What are the best practices of target costing?

Target costing can be a powerful tool for your corporate accounting and decision making, if you follow some best practices. To begin with, involve your customers and stakeholders, such as suppliers, distributors, and employees, in your market analysis and cost setting. Additionally, adopt a cross-functional and integrated approach that covers the entire life cycle of your product or service. Moreover, embrace continuous improvement and learning by monitoring results, evaluating performance, and benchmarking best practices. Doing this will enable you to coordinate activities and decisions with your strategy and budget, as well as innovate and adapt to changing market needs.