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Target costing philosophy

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Quote from a senior manager of a major company: "Our firm has always had a design to cost philosophy. Our engineers have to achieve very tight cost standards when designing new products. Target costing is just the new fashionable term for something we have done all along."

Do you agree with this statement? Has the firm been practicing target costing? Explain your reasoning.

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Our firm has always had a design to cost philosophy. Our engineers have to achieve very tight cost standards when designing new products. Target costing is just the new fashionable term for something we have done all along.

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From the information given above, it does not appear that the firm has been practising target costing. This is due to the fact that One of the key points in target costing is that the target cost is the dependent variable. The market-based Price must be determined first, then the desired Profitability. Finally, the Target Cost is simply the Price minus the Profit. This may seem elementary, but many firms still fall into the trap of first determining the cost of their design, adding a profit margin and letting the sum be the price.

In this scenario, the company pursues a ...

Solution provided by:
Sandeep Bardia, MBA
Education
  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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