What is the difference between target costing and cost-plus pricing?

What is the difference between target costing and cost-plus pricing?

Target costing focuses on determining the desired cost based on market conditions and then designing products to meet that cost. Cost-plus pricing, on the other hand, involves calculating the total cost of production and adding a markup for profit.

Which method is better for competitive markets?

In competitive markets, target costing is often better as it helps ensure that products are priced competitively while still meeting profit margins.

Can you give an example of each method?

Sure! For target costing, a company might decide a product should sell for $100, and if the market allows for a $30 profit, they would aim to produce it for $70. In cost-plus pricing, if the total cost to produce a product is $50, the company might add a 40% markup, selling it for $70.

What are the risks associated with each approach?

Target costing can lead to underestimating costs, while cost-plus pricing may result in overpricing if market conditions change.