What is target costing?
Target costing is a system in which a company plans in advance the price points, product costs, and margins that it would like to use to achieve a new product. This concept will use the selling price of the product in order to determine the production of the cost that is required to enter the market.

Target Costing Example:
Below is an example calculation for target costing. As you can see, the company would base the selling price of a new product on existing factors in the market. Additionally, they would have to factor in a desired profit on each unit, otherwise, what is the point of selling the product, right?
In our example, Sun Surf analyzes the market and determines the new surfboard will have a selling price of $450. Since they require a profit margin of 30%, that means that $135 of the $450 selling price will have to result in a profit. We’re left with a target cost of $315, which means that the company must be able to produce and sell the product for $315 per unit or less.

Back To All Questions
You might also be interested in...
-
CECL Excel Workbook
If you would like to use the Excel workbook that was used to create the Universal CPA lecture on CECL for debt securities, please click the link below to download the Excel workbook: CECL Calculation workbook (Universal CPA Review)
-
Journal Entry for Direct Materials Variance
Journal Entry for Direct Materials Variance In the current year, Mission Burrito budgeted 6,000 pounds of production and actually used 4,000 pounds. Material cost was budgeted for $5 per pound and the actual cost was $8 per pound. What would the debit or credit to the direct material efficiency variance account be for the current...
-
Understanding Variance Analysis
Variance Analysis Variance analysis is a method for companies to compare its actual performance vs its budgeted amount for that cost measurement (related to the flexible budget). The differences between the standard (budgeted) amount of cost and the actual amount that the organization incurs is referred to as a variance. By analyzing variances, the company...
CECL Excel Workbook
If you would like to use the Excel workbook that was used to create the Universal CPA lecture on CECL for debt securities, please click the link below to download the Excel workbook: CECL Calculation workbook (Universal CPA Review)
Journal Entry for Direct Materials Variance
Journal Entry for Direct Materials Variance In the current year, Mission Burrito budgeted 6,000 pounds of production and actually used 4,000 pounds. Material cost was budgeted for $5 per pound and the actual cost was $8 per pound. What would the debit or credit to the direct material efficiency variance account be for the current...
Understanding Variance Analysis
Variance Analysis Variance analysis is a method for companies to compare its actual performance vs its budgeted amount for that cost measurement (related to the flexible budget). The differences between the standard (budgeted) amount of cost and the actual amount that the organization incurs is referred to as a variance. By analyzing variances, the company...