What is target costing and how does it work?

What is target costing and how does it work?

Target costing is a pricing strategy where a company determines the desired profit margin and then works backward to ensure the product can be produced at a cost that allows for that margin.

Can you give me an example of how target costing is applied in a real-world scenario?

Sure! For instance, a smartphone manufacturer might decide they want to sell a new model for $500 and aim for a profit margin of 20%. They would then calculate that the production cost must be $400 or less.

What are the benefits of using target costing?

The benefits include better cost control, improved product design, and enhanced competitiveness in the market.

Are there any challenges associated with target costing?

Yes, challenges can include accurately estimating costs, aligning teams on pricing strategies, and potential pressure on suppliers.