This target costing template shows you how to find the target cost given the selling price and profit margin.
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Target costing is a management technique wherein prices are determined by market conditions brought about by several factors, such as homogeneous products, level of competition, no/low switching costs for the end customer, etc. When these factors come into the picture, management wants to control the costs, as they have no or little control over the selling price.
CIMA defines target cost as “a product cost estimate derived from a competitive market price.”
The formula for computing target cost is:
Target Cost = Selling Price – Profit Margin
The key objective of target costing is to enable management to use proactive cost planning, cost management and cost reduction practices where costs are planned and calculated early in the design and development cycle, rather than during the later stages of product development and production.
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