This refers to the setting of a desired cost for a product based on its preferred sale price less the desired profit margin.
Target costing represents a ‘top down’ approach to setting pricing and production costs; compared with the ‘bottom up’ approach of identifying production costs and adding a profit margin to arrive at a sale price, which may be less than optimum for the market place. Where the target cost is lower than the ‘cost plus’ figure, target costing can lead to innovation in product development and distribution; equally, incorrectly applied it can result in inferior quality products.
Target costing is a term normally found in management accounting and performance management.
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