Describe the stages involved with target costing.

Stages Involved with Target Costing:

1. Market-Oriented Pricing:

• The process begins with market research and analysis to determine the price that the market is willing to pay for a product or service. This market-oriented pricing becomes the target selling price.

2. Target Cost Determination:

• Subtracting the desired profit margin from the target selling price gives the target cost. The target cost is the maximum allowable cost that will still enable the company to achieve its profit objectives.

3. Cross-Functional Teams:

• Cross-functional teams, consisting of members from various departments such as design, production, marketing, and finance, collaborate to achieve the target cost. This ensures that cost considerations are integrated into the entire product development process.

4. Design and Development:

• During the design and development phase, emphasis is placed on cost-effective design choices. Designers work to meet performance and quality standards while identifying opportunities for cost savings.

5. Cost Estimation and Analysis:

• Continuous cost estimation and analysis are performed to track costs at every stage. This involves assessing the costs associated with materials, labor, production processes, and other relevant factors.

6. Value Engineering:

• Value engineering involves examining each component and process to determine whether there are more cost-effective alternatives that can achieve the same functionality, quality, and customer satisfaction.

7. Cost Control and Monitoring:

• Rigorous cost control measures are implemented to ensure that costs do not exceed the target. Monitoring is ongoing, and adjustments are made as needed to stay on track.

8. Continuous Improvement:

• The target costing process is iterative, and continuous improvement is emphasized. As the product moves through its life cycle, ongoing efforts are made to identify and implement cost reductions.

How Costs Are Reduced to Achieve Target Cost:

1. Materials Cost Reduction:
   • Explore options for using cost-effective materials without compromising quality. Negotiate with suppliers to obtain better prices or consider alternative materials.
2. Manufacturing Process Efficiency:
   • Optimize manufacturing processes to reduce labor costs, improve efficiency, and minimize waste. Implement lean manufacturing principles and automation to streamline production.
3. Standardization and Simplification:
   • Standardize components and processes to achieve economies of scale. Simplify designs to reduce the number of parts and the complexity of assembly.
4. Supplier Collaboration:
   • Work closely with suppliers to negotiate favorable terms, explore cost-saving initiatives, and secure discounts on materials and components.
5. Value Analysis and Value Engineering:
   • Conduct value analysis to assess the value of each component in relation to its cost. Use value engineering to redesign products or processes for cost efficiency without sacrificing quality.
6. Life Cycle Cost Considerations:
   • Consider the total cost of ownership over the product's life cycle, including maintenance and disposal costs. Optimize designs to minimize long-term expenses.
7. Cost Monitoring and Feedback:
   • Continuously monitor costs at each stage and gather feedback from cross-functional teams. Use this information to make informed adjustments and identify areas for further cost reduction.
8. Market Feedback:
   • Incorporate feedback from the market regarding customer preferences, perceived value, and price sensitivity. This information helps in refining the target cost and making necessary adjustments.

Target costing is a dynamic and collaborative approach that involves various departments working together to achieve a cost-effective product that aligns with market expectations. It requires a commitment to continuous improvement and cost-conscious decision-making throughout the product development and production processes.