What is the difference between target costing and traditional costing?

What is the difference between target costing and traditional costing?

Target costing focuses on determining the desired cost based on market conditions and desired profit, while traditional costing allocates costs based on historical data and production processes.

Can you explain how target costing is implemented in a business?

Sure! Target costing is implemented by first setting a target price based on market research, then subtracting the desired profit margin to determine the target cost. The company then works to meet this cost through design, production, and operational efficiencies.

What are the advantages of using target costing?

The advantages include better alignment with market demands, enhanced cost control, and improved profitability by focusing on cost management from the start of the product development process.

Are there any disadvantages to target costing?

Yes, some disadvantages include the potential for reduced product quality if cost-cutting is prioritized too much, and the challenge of accurately predicting market conditions and customer preferences.

How does traditional costing affect pricing strategies?

Traditional costing can lead to less competitive pricing strategies since it may not reflect current market conditions, potentially resulting in higher prices that do not align with customer expectations.