Target Costing

Build-in or improve margin over a product/service lifecycle

When you set, and meet, a target cost the impact is significant:

  • more products/services contribute more to margin
  • fewer products/services are loss-makers

Getting costing right is an essential investment in financial success. Failure to do accurate costing is a recipe for disaster if selling at less than cost price or the sales effort is focused on low margin /ow volume products.

Which of your products/services contribute most to margin?

Which products/services are loss-making?

How significant is sales volume to the answer to both these questions?

Target costing is not cost reduction or expense reduction as these ‘school of hard knocks’ case studies confirm:

  • Boeing – outsourcing on price, not quality or service, at great cost to revenue and the industry
  • Carlton & United Breweries – removing valued features and benefits at the cost of market share
  • Victorian Government – a ‘budget anchor’ undermining clear objectives to quarantine from Covid-19

Target Cost is determined by subtracting the desired profit margin from a competitive market price to:

  • monitor a product’s contribution to profit throughout the product 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 internal costs
  • identify sales target required to transform Gross Margin Estimates to banked dollars and profit
  • retain valued features and explore opportunities to change less valued components to improve profit