Target Costing - Definition

A target cost is calculated by subtracting a desired profit Margin from an estimated or a market-based price to arrive at a desired production, engineering, or Marketing cost. This may not be the initial production cost, but one expected to be achieved during the mature production stage. Target costing is a method used in the Analysis of product design that involves estimating a target cost and then designing the product/service to meet that cost. To compete effectively, organizations must continually redesign their products (or services) in Order to shorten product life cycles. In traditional costing system it is presumed that a product has already been developed, has been costed, and is ready to be marketed as soon as a price is set. The planning, development and design stage of a product is therefore critical to an organization's Cost Management Process. Considering possible cost reduction at this stage of a product's life cycle (rather than during the production process) is now one of the most important issues facing management accountants in industry.

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