Target Costing

Target Costing Concept

The expression Target Costing designates a cost reduction process in the development and design phase of a new product differing, therefore, from the costs control system of the traditional costs which occurs only in the production phase. The reason for this process to occur in this phase is due to the fact that it’s in it that is possible to take decisions and perform changes that will have higher impact in the fixed costs.

Target Costing process relies in two distinct phases:

• The first phase consist on the planning of the specific product which satisfies the clients’ needs and, simultaneously, establishes the target cost from the target returns (or profit) and the target price.
• The second phase consists on the performance of the target cost through the Value Engineering’s activities subsequently performing the comparison between the target cost and the effective cost.

In a more detailed way, Target Costing process can be divided in five steps, namely:

• Corporative Planning: step in which are established medium and long term profitability plans for the whole company and is established the target profit for each product in each period.
• Project development of a new product: step in which is built the product plan an in which will be searched to conciliate goals in terms of the clients’ needs satisfaction and the products’ technical specifications.
• Basic plan construction for a new product: it’s in this step that are determined the most relevant costs for the new product and in which are established the target price and the target profit; from the target price and the target profit will then be established the target cost; this target cost should be established in a way of being simultaneously realistic and motivating for the employees.
• Product design: in this step are created a series of prototypes according to the established target cost; should be made all necessary adjustments so that the estimated cost be similar to the target cost, time in which is defined the definitive prototype.
• Transfer plan for production: step in which is concluded the estimated costs calculation according to the definitive prototype.