Market Level
The First Phase of the target costing process leads to establishing the target price of the product.this is a key difference to traditional costing methods: Target costing is price-based and therefore rooted in the market.for new products the process of finding a market price begins with the definition of the market niche the company wants to address. The basic needs the product should address for the group of potential customers are defined as well.A detailed competitive analysis evaluates what kinds of products are presently available to potential clients through competitors,and what changes may be expected upon the introduction of a new product to this market.These two activities then lead to a specific definition of the market niche and the target group.Once the target group has identified and defined ,customer requirements for the product can be determined. understanding the relevance of various requirements is a key element in target costing and product development .The final activity in the market level phase is establishing a target profit.the target profit for a specific product is based on long-term profit strategies for the company as well as short-term market share strategies for the product.
The actual target cost of the product is then simply based on the formula
Target cost= target price-target profit
Product Level
The second phase of the target costing process deals with designing the product so that it will meet the target cost.the first step in this phase is to determine the status quo and computing what cost of the new product would be,based on existing cost experiences from current products.these is usually plenty of data available apparel companies.this data is often generated by a traditional standard costing system,and additional work may have to be done in order to break down the cost by components. For completely new products this cost estimate is done by approximating the cost through comparision to existing or similar products.comparing this cost to the target cost provides the cost gap that tells the company how much the product cost has to be lowered. In the following step cost has to be designed out of the product.This means that when designing the product cost considerations drive the process.the choice odf design is influenced by its potential impact on all cost factors.It is important to note that all costs needs to be considered at this stage ,including supplies,manufacturing,marketing,distribution and cutomer service.The cost in all these areas is influenced by a products design,and it needs to be addressed before any resources in these areas are commited.
The critical differsnce between traditional product costing and pricing and target costing is the market orientation and the price-lead product design.Through out the process ,target cost remains overriding goal i.e under no circumstances may the target cost be exceeded.In traditional cost-lead pricing product design typically determines the price based on component and conversion costs.
Important techniques in designing cost out of the product include value engineering(VE), design for manufacture and assembly (DFMA) and quality function deployment(QFD) .value is defined as function/cost and as such reflects the producers perspective.percieved value is defined as perceived benefits/price and as such describes the customers perspective. VE is systematic evaluation of cost factors with the goal of Maximizing customer value.DFMA focuses on designing a product that is easy to assemble and manufacture. The QFD matrix links customer requirements and their relative importance with product functions or product components.