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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.
Translated from Portuguese
by Susana Saraiva, Portuguese-English and English-Portuguese translation
specialist. Contact: spams@sapo.pt.
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