Target costing is a costing method that determines cost based on selling price. First, the selling price is set based on market research. The selling price is set because it is necessary to forecast what price the consumers will be willing to pay for it.
Once the price is set the company sets aside its mark-up on selling price and deducts it from selling price. The resulting cost is the target cost that the production team is to achieve. For example, the selling price for a new product is set to be $48/unit and there is a mark-up requirement of 20% of the product cost.
|
Cost |
+ |
Mark-up |
= |
Selling price |
|
100% |
+ |
20% |
= |
120% |
|
40 |
+ |
8 |
= |
48 |
The following conversation took place between Juanita Jackson, vice president of
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Explain the target costing process. How is it calculated?
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As a manager asked to benchmark another organization’s target costing system,
For many years, Lehigh Corporation has used a straightforward cost-
