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Advanced Costing Methods
Target costing in service organisations
8.1 Relevance
Target costing is as relevant to the service sector as the manufacturing sector.
Key issues are similar in both: the needs of the market need to be identified and
understood as well as its customers and users; and financial performance at a given
cost or price (which does not exceed the target cost when resources are limited)
needs to be ensured.
If a firm of accountants was asked to bid for a new client contract, the partners
or managers would probably have an idea of what kind of price is likely to win
the contract.
If staff costs are billed out at twice their hourly salary cost, say, this would help
to determine a staff budget for the contract. It would then be necessary to work
out the hours needed and play around with the mix of juniors/senior staff to get
to that target cost.
Illustrations and further practice
Now read Illustration ‘Target costing in the NHS’.
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