Target Cost is determined by subtracting the desired profit margin from a competitive market price to:
- monitor a product’s contribution to profit throughout its products life cycle
- achieve target profitability as an investment in improved financial performance
- make an informed response to changes in market price in full knowledge of costs
- identify sales target required to transform Gross Margin Estimates to banked profit
- without removing valued features, explore opportunities to change components to improve profit
Getting costing right is an essential investment in financial success.
Failure to get your costs right can be a recipe for disaster by selling at less than cost price or focussing sales effort on low margin products.
Don’t confuse target costing with cost reduction or expense reduction. Learn from the ‘school of hard knocks’:
- Boeing – outsourcing on price not quality
- Carlton & United Breweries – losing sight of valued customer features and benefits
- Victorian Government – a ‘budget anchor’ undermining clear objectives to quarantine Covid-19