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Target Costing
The pricing method which is widely used by many organization involved in the business world is known as target costing. It is one of those tools which are used by the cost management for the reduction of overall cost of the product over its complete life cycle with the help of research, production, design and also engineering. The maximum amount of cost which is incurred on a certain product is target costing. Key principles of target costing are price-led costing, life-cycle costs, focus on process design, focus on the customer, focus on product design, value chain orientation, cross-functional teams. There are three methods in target costing subtraction method, addition method, and integrated method.
Target Costing Is Basically a Different Approach. It is based on three premises
(I) orienting products to customer affordability or market-driven pricing.
(ii) Treating product cost as an independent variable during the definition of a product’s requirements.
(iii) Proactively working to achieve target cost during product and process development. It is a profit and cost management system that helps a company to achieve market and financial success by planning the portfolio of services, and designing the products, processes and related cost structures that provide value to customers.
The four basic steps of Target Costing are as follows
• Maintain Competitive Costs
• Define the Product
• Achieve the targets, and
• Set the price and also cost targets
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