When should I use target costing?

What is target costing and when should I use it?

Target costing is a pricing strategy where you determine the desired profit margin and then work backward to set a target cost. You should use it when you need to control costs and remain competitive in price-sensitive markets.

Can you give me an example of when target costing would be beneficial?

Sure! Target costing is beneficial in industries like consumer electronics, where price competition is fierce. For instance, if a smartphone manufacturer wants to sell a new model at $300 with a desired profit of $50, they would set a target cost of $250.

What are the main challenges of implementing target costing?

Some challenges include accurately estimating costs, aligning all departments with cost targets, and ensuring quality is not compromised while reducing costs.

Is target costing suitable for all types of products?

Not necessarily. Target costing is best suited for highly competitive markets with price-sensitive customers. It may not be ideal for luxury or niche products where customers are less price-sensitive.