target costing process
2. Establishing a Selling Price for the product
Based on the market research of a new product and also the market condition, the selling price is established. The desired profit margin is subtracted from the target selling price to determine the target cost. If the target cost is below the company’s current cost, the company may decide to introduce the product and functional cost analysis may attempt to reduce cost to an acceptable level. If the target cost is above the current cost, functional cost analysis will make changes and prepare another cost estimates. If the target cost is equal to current cost, company may decide whether or not to introduce the new product.
As an example, based on the market condition, TMCA want to produce new model of car named Corolla Ascent 4D Sedan at a selling price of $20,740.
3. Establishing a Target Profit for the product
Marketing department plays an important role in determining the target cost of the new product. After estimating the target selling price, the company has to estimate the sales volume in order to calculate the total sales revenue. From the total sales revenue, the desired profit, normally determine by using return on sales, is subtracted. After that the desired profit margin is determined with reference to the company’s long-term strategy.
As an example, TMCA estimates its sales volume of 200 units. So, its total sales will be $4,148,000. Based on the long-term company’s strategy, assume that the target profit margin is 32.26%.
4. Determine the target cost
The target cost is arriving from subtracting the desired profit from the selling price. Management accounting can play important role in determining the target profit and target cost. Accountant can supply information needed to the management to support the analysis of the new product. After target cost is determined, functional cost analysis team is used to achieve the target cost. The team is a group activity typically involves
Based on the market research of a new product and also the market condition, the selling price is established. The desired profit margin is subtracted from the target selling price to determine the target cost. If the target cost is below the company’s current cost, the company may decide to introduce the product and functional cost analysis may attempt to reduce cost to an acceptable level. If the target cost is above the current cost, functional cost analysis will make changes and prepare another cost estimates. If the target cost is equal to current cost, company may decide whether or not to introduce the new product.
As an example, based on the market condition, TMCA want to produce new model of car named Corolla Ascent 4D Sedan at a selling price of $20,740.
3. Establishing a Target Profit for the product
Marketing department plays an important role in determining the target cost of the new product. After estimating the target selling price, the company has to estimate the sales volume in order to calculate the total sales revenue. From the total sales revenue, the desired profit, normally determine by using return on sales, is subtracted. After that the desired profit margin is determined with reference to the company’s long-term strategy.
As an example, TMCA estimates its sales volume of 200 units. So, its total sales will be $4,148,000. Based on the long-term company’s strategy, assume that the target profit margin is 32.26%.
4. Determine the target cost
The target cost is arriving from subtracting the desired profit from the selling price. Management accounting can play important role in determining the target profit and target cost. Accountant can supply information needed to the management to support the analysis of the new product. After target cost is determined, functional cost analysis team is used to achieve the target cost. The team is a group activity typically involves