The Advantages of Target Costing on a Companie's Profitability

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Introduction

Mobi Plus Ltd produces mobile phones for sale in various shops and supermarkets. In today’s competitive market where mobile phones have a short product life cycle, it is important for producers to develop and market products that not only meet the customers demand for features and applications at a certain price level but also generate the desired profits to make it a viable business model. This essay analyses the benefits and limitations of using target costing and life-cycle costing systems over the costing and performance measures currently being utilised by the company. The techniques currently being used by the company are useful for keeping costs under control, but they do not give an indication of the maximum costs the company can allow for designing new product features or profits over the total life cycle of a product.

Target costing.

Target costing is a pricing method used by companies as a cost management tool to determine the maximum cost at which a product must be produced to generate the required rate of return to earn the required profit margin The cost control techniques that are currently being used by the company are useful in managing costs during the initial production stage, however, moving cost management from the production stage to the product development stage generates increased profits due to lower costs . This is particularly useful for companies producing goods for the re-sale market as the re-seller (shops and supermarkets etc) drive tougher bargains as they have their own profit margin to include in their sell on price. The planning, design and development stage of a product is critical to a companies’ cost management process, particularly in an industry where product lifestyles are short. The benefits of target costing are increased if specific targets for costs and product features are established earlier in the product development cycle rather than during the production process. Cost analysis in the early...
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