Target costing is a simple process which does seem rather complicated. In more simple terms it is explained as a tool which is used for cost management. Target costing is implemented as best practice to reduce the overall cost of the product.
Best practices in target costing include:
Ø Price Led Costing: There is a basic formula used to determine the target cost. It involves reduction (subtraction) of the required profit margin from market prices.
Ø Focus on Customer: Focus on the customers’ requirements for quality, cost and time in making decisions about target cost.
Ø Focus on Design: The designing process must involve best practices in cost control and time-to-market. Changes in design must be made before the production process begins.
Ø Cross Functional Involvement: Teams involved in cross functional product and the process must be responsible. They must be actively involved from the beginning to the end of the process.
Ø Value-Chain Involvement: Members of the chain of production include suppliers, distributors, customers and service providers. All these must be involved in the process of target costing to ensure best practices at various stages.
Ø Life Cycle Orientation: Both producer and customer must gain benefits of minimizing the total life cycle cost. This involves purchase costing, operating cost, maintenance cost and distribution cost. .
Teams involved must employ a variety of tools and initiatives to achieve their objectives through best practices.
Ø Value Analysis: Analyzing the effective cost to benefits of a new design to the consumer.
Ø DFMA – Design for Manufacturing Assembly: This means evaluating effectiveness of the new design with regards to the process of assembling the new product.
Ø Paper Kaizen: This is a term which describes the concept of continuous improvement. It requires setting up of workstations, reviewing assembly steps, and assessing the flow of the process on paper as best practice. This is important for optimizing expenses before they are incurred.
Ø Hands-on Workshop: There is need to improve material flow and time management as production of new designs continues.
Good target costing requires best practices at every stage and helps businesses in achieving cost control and profit enhancement.