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Advanced Costing Methods

7.2 Closing the target cost gap
The target cost gap is established in step 4 of the target costing process.

Target cost gap = Estimated product cost – Target cost

It is the difference between what an organisation thinks it can currently make a
product for, and what it needs to make it for, in order to make a required profit.

Alternative product designs should be examined for potential areas of cost reduction
that will not compromise the quality of the products.

Questions that a manufacturer may ask in order to close the gap include:

 Can any materials be eliminated, e.g. cut down on packing materials?

 Can a cheaper material be substituted without affecting quality?

 Can labour savings be made without compromising quality, for example,
by using lower skilled workers? Can productivity be improved, for example,
by improving motivation?

 Can production volume be increased to achieve economies of scale?

 Could cost savings be made by reviewing the supply chain?

 Can part-assembled components be bought in to save on assembly time?

 Can the incidence of the cost drivers be reduced?

 Is there some degree of overlap between the product-related fixed costs
that could be eliminated by combining service departments or resources?

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