Right from the start external environment is focused because there is a lot of market study required which helps to know the market conditions from the day one resulting into more chances of success. And also cost control is much more effective as compare to the traditional costing methods. However, the implementation cost of target costing can be high and it maybe more time consuming than traditional methods as it is not easy to identify a suitable price. Traditional Costing versus Target Costing Traditional or cost-plus costing and target costing are the most commonly used methods for pricing goods and services.
Share on Facebook Companies have a few options when determining a price for their products and services. Cost-plus pricing is a simple and intuitive way to determine prices. Using cost-plus pricing, the company determines all of the costs incurred in making a product by employing a standard costing method.
Management determines the selling price by adding a profit element based on the total product cost. Direct Materials Direct materials encompass all of the materials used in production. For a baking company, direct materials might be flour, sugar, eggs and wrappers. To determine the direct material cost, divide the cost of the materials used by the number of products produced in the period.
Direct Labor The direct labor expense is the wages paid to employees directly involved in creating the product. Our hypothetical bakery's direct labor costs would be anyone in the kitchen creating the cupcakes. Direct labor doesn't include administrative wages paid to supervisors, human resource and accounting staff.
Just like with the direct materials calculation, the average direct labor cost is the dollar amount of wages divided by the number of products. Overhead Overhead expenses encompass all of the other costs associated in creating the product. This includes supervisor and administrative salaries, rent and utilities.
The cost base for allocating overhead expense could be direct labor hours or direct materials, depending on what the company feels is the most accurate cost driver. Say, for example, that the bakery management feels that overhead is best allocated by the number of direct labor hours the product consumes.
The company would multiply overhead cost for the month by the percentage of labor hours the product uses. Profit Element The company will add some percentage of markup after determining the total product cost.
One common criticism of cost-plus pricing is that this markup is generally based on what management wants to earn rather than what customers are willing to pay.
Companies should keep close tabs on competitor prices to ensure that they're not overpricing or underpricing their products.Target Costing Target costing is a market-driven system of cost reduction, focused on managing costs at the development and design stages of a product.
The Japanese believe that cost reduction activities, especially in automated plants, carried out in the production stage of a product have a limited effect. Target Costing is a disciplined process that uses data and information in a logical series of steps to determine and achieve a target cost for the product.
In addition, the price and cost are for specified product functionality, which is determined from understanding the needs of the customer and the willingness of the customer to pay for each.
Accounting test #2 study guide by kylerhoward79 includes 26 questions covering vocabulary, terms and more. B. target costing. In cost-plus pricing, the markup consists of. B. desired ROI. When using cost-plus pricing, which amount per unit does not change when the expected volume differs from the budgeted volume?
A. Variable Cost. With cost plus pricing we start with the cost and add on a % to get the selling price. But there is then no incentive to reduce costs.
With target costing we start with a realistic selling price and then decide what the maximum cost has to be to be able to get the desired profit. Target costing is a pricing method used by companies as a cost management tool to determine the maximum cost at which a product must be produced to generate the required rate of return to earn the required profit margin The cost control techniques that are currently being used by the company are useful in managing costs during the initial.
Kaizen costing and target costing The cost-plus method is one of the most traditional and common pricing techniques. In fact, virtually all companies in the UK used cost-plus pricing until they started to realise that they were operating in price-competitive markets.
Until then, they had.