Target Costing

lhemmings

Hi ya

I have just answered a question from PEV June 06 and just want to make sure that I am on the right tracks as the model answers dont make it clear for me:

2.2 a - State briefly what is meant by target cost.

I have answered: A target cost is where a business uses the market value price for a product that is going to be in a competitive market and takes away the profit the company wants to make away from that price.

2.2 b - Calculate the target cost for the manufacture of the new brake disc.
Brake Disc Price £1000, profit margin 55%

I worked it out like this: 100-55 = 45, £1000/100x45 = £450 target cost
(the answer is right, I have just worked it out differently to the answers and want to make sure this would be ok?)

gregory

1000 x 55% = £550 that is targeting profit.
SO £1000 less £550 = £450 targeting cost

This is a way I have learnt. Just will see tomorrow if that right or not

Khurram Taj

Target costing

Target costing is a method, which is used by management when they have to take a given market price for the product, so than they set a target cost for the product to get desired profit margin.

The target cost is calculated by :-


Target cost = Market Price x (1 - profit margin)

= 1,000 x (1 – 0.55) = £450

I hope it will help you to understand the target costing. and I would advise you don't forget to look at life cycaling.

Best regards

Khurram Taj