Advantages And Disadvantages Of Target Costing

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Target costing is the “process of determining the maximum allowable cost of a new product and then developing a prototype that can be profitably made for that maximum target cost figure” (Seal et. al, 2015). Target costing is an administration system aimed at diminishing a product’s life-cycle costs (Mohan, A., no date). CIMA describes target cost as a product cost estimation that is gotten from a competitive market price (ACCA, 2017). This essay will give a comprehension of target costing, its benefits and limitation A primary advantage of target costing is that it enables one to identify the most ideal approach to make or secure products at a reduced cost. Reducing expenses is a typical budgetary objective of any independent company,…show more content…
As per the case of OMB target costing is applied to an existing product with modifications as one of its employees developed a new braking system. Another benefit of target costing is that it connects with customers and suppliers to design the right product and to all the successfully coordinate the whole store chain (Mohan, A., no date). The marketing team of OMB carried out a survey on its customers about the new mountain braker outline. The survey proved that customers were eager to buy this new model. OMB’S staff identified some features that are exceedingly vital to the customers; ranging from the weight of the bike to the riding comfort over rough…show more content…
It considers the two factors in profit: cost and expense. Numerous organizations begin by designing products and base pricing on costs. By beginning with market pricing in the first place, it helps guarantee that one winds up with a product that has benefits and a price point that customers will esteem. (Kokemuller, N., 2015). Vanessa sets a minimum profit margin of 10% on new products. The market price for competing brands range from £800 to £1200. OMB decides sets its price at £950 to realize a 25% market share. At the price of £950 per bike a profit margin of £95 is achieved. Hence a target cost of £855. In essence, OMB can achieve the optimal price-to-cost relationship. Target costing can be described as beneficial but as there is no perfect management system it also has its limitations. The development of the procedure can be stretched to a significant degree since the design team may need various design alterations before it can develop minimal cost product that meets the target cost and margin criteria. This event is most regular when the manager is not willing to suspend an outline project that cannot meet its costing objectives in a sensible time allotment (Mohan, A., no

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