Page 189 - APM Integrated Workbook STUDENT S18-J19

The role of quality in performance measurement

3.3 Target costing

Target costing involves setting a target cost by subtracting a desired
profit from a competitive market price.

Steps:

Step 1 Step 2 Step 3 Step 4

A competitive The desired The difference Techniques are
market price is profit margin is between the used to close
set based on deducted from estimated cost the gap. Many
what customers this price to for the product of these will be
are willing to arrive at a and the target employed at
pay and how target cost. cost is the cost the design
much gap. stage. The
competitors are focus should be
charging for on features that
similar do not add
products. value (value
analysis).

Target costing and Kaizen costing
 Target costing usually occurs at the beginning of a product’s life.

 Kaizen costing uses the principles of target costing but it is the process of
long-term continuous improvements by small, incremental cost reductions
throughout the product’s life.

 With Kaizen costing, any target cost that is established will be revised on a
regular basis.

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