Target Costing

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

Importance of Accurate and Timely Costing

Getting cost right in a business is an essential investment in financial success.

Failure to accurately cost goods/services can be a recipe for financial disaster.

The risk is selling at less than cost price, which some of our clients were previously doing, or sales increasing the volume of low margin rather than higher margin goods/services.

Do you know:

  • Which products/services generate the highest margin?
  • Which products/services contribute most to profit?
  • Which products/services are loss-making? i.e., sold at a lower price than their true cost
  • What volume of loss making products/services are you selling monthly and yearly?

Target Cost

Target Cost is determined by subtracting the desired profit margin from a market price.

Target costing is more than blind cost or expense reduction.

When you set, and meet, a target cost, significant benefits include:

  • more products/services contribute more to profit
  • fewer products/services are loss-makers
  • the sales effort becomes focused on increasing the sales volume of higher margin products/services

The following case studies confirm the financial and non-financial cost of blind cost or expense reduction:

Boeing

  • outsourcing on price, not quality or service, resulting in reduced revenue and increased inventory

Carlton & United Breweries

  • removing valued features of a beer resulting in reduced sales volume and market share

Victorian State Government

  • allowing a ‘budget anchor’ to undermine specific quarantine objectives resulting in a community lockdown

Costing in a Competitive Market

Once prices are set, internal staff rarely question the accuracy of costing and margin estimates which are rarely revisited despite the cost components varying over time.

Target costing allows a business to:

  • monitor a product’s contribution to profit throughout its product life cycle
  • achieve target profitability which improves financial performance and increases profit
  • respond to changes in a competitive market price in full knowledge of internal costs
  • identify sales target to transform Gross Margin estimates to banked $s and profit
  • retain valued and remove less valued features unnecessarily increasing cost.

Volume and Margin

Contact Cost Management Specialists on 0411 522 521 to discuss how a Volume and Margin matrix adds value by identifying the goods/services to be:

  • target costed if they are to contribute to improved financial performance
  • reviewed based on their cost components and the value those components represent to the customer
  • the focus of marketing and sales to increase revenue, margin, and profit