Target costing is a process which involves a company laying down strategies in advance for the product costs, price points and margins. These factors are set as short-term goals that the company wishes to achieve for its new product. The strategy connects to a process as it involves some steps that you must follow strategically for the success of the company.
Therefore, target costing is one of the best tools for achieving profitability. So the following section presents the steps necessary for the process.
Target Costing: The 10 Steps You Need to Consider
1. Undertaking a Market Research
The main purpose of any business remains to provide the satisfaction of the customer’s needs. Also, the process should involve determining exactly what the customer wants. The research should include:
- The quality of the products;
- Their set cost of the products.
It is through the research that the company can have a clear insight on the products that need changes, or replacement to meet the customer’s perceptions and expectations.
2. Getting the Identity of the Nature of Market
For the success of any business, various stakeholders must always be involved. This includes the competitors, customers, and your existing company. As the manager of a company, you will need to collect information that will offer the knowledge of what you should expect while out there in the field. This includes trying to get an idea of the:
- Specific products in the market;
- Number of competitors that you will be out to meet;
- Level of competition;
- Number of existing products that you will find out there.
In addition to this, it is this step that you should find out the average price in the market.
3. Translating the Customers’ Needs into Product Features
While out there in the market, the taste of one customer will always be different from that of another. These differences are what marketers call product preferences.
Therefore, you have to identify the customer needs which are significant for the progress of your business. It is through these preferences that we bump to the product which is the tangible thing.
4. Development of a Product Design
This is a step that one achieves through close surveillance and analysis of the state in the market. It calls for reviewing:
- Market forces;
- Customer needs;
- Competitors’ models;
- Relevant technology;
- Performance features;
- Product configuration;
- Design alternative;
- Service requirements;
- Process capabilities, among others.
Tabling out these factors have largely aided in coming up with suitable product designs through the determination of the company. It is only through such as this design that there can be any assurance of getting to the set profit and the cost of each of the available components.
5. Defining the Price, Margin and the Cost in the Market
The main purpose of this step has always remained to determine the target selling price. It is through this research that people avoid losses. Other key factors to consider other than the target selling price are the target cost and the target profit.
By establishing the margin between the costs, you can come up with the maximum and the minimum prices in his commodities in the most comprehensive way.
6. Piloting a Value Engineering Process
This process is conducted to help in the determination of the target cost. It is the price that is always in the midst of the target selling price and the target profit.
More to this, the target selling price can never be altered at any cost. It is in the best interest of every business to engage in constructive ways that will assist reach the target cost.
7. Design Improvement to Reach the Target Cost
The step also goes as piloting. This is where all the testing is done to find out whether the expected and target results can be met. The step should ensure:
- Performance of all products;
- Target profit margin;
- The target cost.
The trial process only comes to completion or is said to be successful only after the product design matches the target cost.
8. Endorsement by the Top Management
The main aim of carrying out the entire trial process is finding out whether the returns from the products are worth their costs. The staff in the field must thus present a detailed report on their findings to the top management of the company involved.
Through the report, it should address all of these:
- Entire production process;
- Elements of the cost involved;
- Design of the specific products;
- Total cost incurred in the process.
It is only after receiving a formal approval that the commercial production can initiate the process.
9. Conservation of Accounts
For any business to achieve success, the production cost must never exceed the target cost of the product. This is all that this step aims to achieve. Consequently, your company should not incur any losses. In case the company had produced many products at once, each of those products should be accounted for in separate records to avoid confusion.
If the costs never balance or are uncontrollable, changing the product design remains as the only solution. Otherwise, the product will continue accumulating into losses.
10. Applying the Target Costing
This step should always come last as it is where the company gets the information relating to the expenses incurred in each design. Its aim has been bringing the total cost within the target cost that can only be met through a continuous scrutiny of the processes and steps involved.
The step marks the completion of target costing. Moreover, by this step your company should be ready to reap the benefits of target costing.
To the Sum
Target costing is popular as an excellent tool that helps businesses realize higher profitability. Also, the strategy has been successful for many companies around the world. Due to its remarkable advantages, it is a crucial survival tool.
Despite all these benefits, the strategy requires that those companies have some legacy products. This includes the products with minimal updates as well as those whose profitability has geographical coverage. A good example of such products is soft drinks.