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Chapter 11

Target Costing

Target Costing is a proactive cost control system. The target cost is
calculated by deducting the target profit from a pre-determined selling
price based on customers’ views.

Step 1: A target price is set, based on the customers’ perceived value of the
product. This will therefore be a market based price.

Step 2: The required target operating profit per unit is then calculated. This
may be based on either return on sales or return on investment.

Step 3: The target cost is derived by subtracting the target profit from the
target price.

Step 4: The cost gap is then calculated.

Step 5: If there is a cost gap, attempts will be made to close the gap with
techniques such as value engineering which will look at every aspect of the
value chain business function.

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