Chapter 2 - Target Costing Flashcards
What are the problems with the traditional approach to determine selling price by taking cost and then adding a profit percentage
The price could be unacceptable to customers
No incentive to cut costs
What is the alternative to the traditional selling price by taking costs and adding a profit percentage
Target costing
What steps are involved in target costing
For market research determine selling price
Determine the profit required e.g. a required profit margin or required return on investments
Calculate the maximum cost per unit
Compare actual costs with target costs and if actual costs are higher than look at ways to reduce and if it cannot be reduced than the product should not be produced
What is the use of target cost
The use is to determine the cost gap and once determined deciding if we can actually reduce actual costs or not launch product altogether
Ways to close the target cost gap
Examine costs and look for cheaper e.g. materials or labour
Re-examine the design of the product and see if we can reduce costs without needing to reduce price. For example for a table using less wood?
Target costing in service industries
And the five major characteristics that distinguish services from manufacturing
It is much more difficult to use target costing and service industries due to the characteristics of service businesses. It is much easier to use target cost thing when there is a physical product.
- Intangibility
- Inseparability/simultaneity - with a product there is two separate steps you make the product and then sell the product but with a dentist you are getting the service as he is delivering it therefore we can’t work out how much something is costing before we provide it
Hetrogenuity/ variability - things are different each time (dentist) unlike with goods where we make the same product over and over again
Perishability -
No transfer of ownership -
