Target Costing (1) Flashcards
What is known as cost plus pricing?
Calculate cost of manufacturing and selling a product, then add mark-up
Major criticism of cost plus pricing techniques?
Do not consider any external factors
What is target costing?
Involves setting a target cost by subtracting a desired profit margin from a target selling price
What is the target cost?
Cost of which a product must be produced and sold to achieve the required amount of profit at target selling price
When a product is first planned?
it’s estimated costs will often be higher than its target cost
What is the aim of target costing?
Find ways of closing this tharget cost gap and producing/selling the product at target cost
What must be done by organisations when there’s a modern environment with shortening product life cycles?
Organisations must redesign their products frequently
As product life cycles have become much shorter?
The planning, development and design stage of a product is critical to an organisation’s cost management process
When must cost reduction be considered in a product’s life cycle?
The planning, development and design stage
What is meant by functional analysis?
Reducing costs by amending features of a product
How can functional analysis be applied?
At the design stage of a new product and a target cost for each function can be set
What does achieving a target cost usually require?
Some redesigning of the product and the removal of unnecessary costs
1st step in implementing target costing?
Define product specification and estimate sales volume
2nd step in implementing target costing?
Set a target selling price at which company can achieve desired market share
3rd step in implementing target costing?
Estimate required profit based on profit margins or return on investment
