Target Costing

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Definition: Target Costing

Target costing is a process of determining the actual cost price of any product or service after considering the desired profit margin behind the same.

Formula

Target Cost = Expected selling price – Desired profit

It helps in completing the product within the set price by changing the process for the same or by making the existing process more efficient.

The process of target costing is as below:

  1. Identification of customer needs and wants
  2. Selling price is planned for the needs.
  3. Target cost identified which is Expected selling price – Desired profit
  4. Product is designed, manufacturing process is fixed and suppliers are identified keeping the price in consideration.
  5. The sample product is produced that meets the target and the production starts for selling purposes and the product is launched

 

 

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