Target Costing

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lhemmings
lhemmings Registered Posts: 7 New contributor 🐸
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?)

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  • gregory
    gregory Registered Posts: 37 Regular contributor ⭐
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    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
    Khurram Taj Registered Posts: 29 Regular contributor ⭐
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    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
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