26 terms

Target costing

Target costing
involves setting a target costs by subtracting a desired profit margin from a target selling price
Target cost require
some re-designing of the product and removal of unnecessary costs
Target cost is most effective
at the product design stage (it easier and cheaper to make changes that reduce costs) and development phase
Target cost is less effective
for established products that are made in established processes
Step 1 : target costing
determine product specification of which an adequate sales volumes is estimated
Step 2 : target costing
Decide a target selling at which the organisation will be able to sell successfully and achieve a desire market share
Step 3 : target costing
estimated required profit, based on require profit margin and return on investment
Step 4 : target costing
calculate: Target cost = target selling price - target profit
Step 5 : target costing
prepare estimated cost for the product, based on the initial design specification and current costs levels
Step 6 : target costing
calculate: Target cost gap = estimated cost - target cost
Step 7 : target costing
Make effort to close the gap
'design out' cost prior to production is more successful than
'control out' cost after 'live' production has started
estimate target cost based on
target selling price per unit and
expected volume of sales
closing target cost gap through component
reducing numbers of component
using standard where possible
closing target cost gap through staff
use cheaper staff
training staff in more efficient techniques
closing target cost gap through others
using different materials
acquiring new, more efficient technology
cutting out non-value added activities
characteristic of services
no transfer of ownership
any activity of benefit that one party can offer to another that is essentially intangible and does not result in the ownership of anything.
its production may or may not be tied to a physical product
lack of substance which is involved with service delivery
no substantial material or physical: taste, feel, visible presence
many services are create at the same time as they are consumed
problem of maintaining consistency in the standard of output
when delivery by human, difficult to ensure same service is provided in exactly same way and same time
services are innately perishable
No transfer of ownership
the purchase only confers on the customer access to or right to use a facility
Target costing in services difficult because of
intangibility and variability
difficult of intangibility
some of the features of a service cannot be properly specified
services do not have any material content
difficult of variability/homogeneity
a service can differ every time it is provided, and a standard service may not exist