How to achieve your desired profit in a manufacturing industry?

Query no.1: 

What is target costing?

Solution: 

Target costing is a cost reduction technique and its real essence exists at the design stage because major cost can only be reduced at this point of time. This is not just a costing technique but also an evolution to achieve your desired profitability.

Query no.2: 

What is the aim of target costing?

Solution: 

Target costing is the cost at which product must be produced and sold in order to achieve required profit at the targeted selling price. When product is planned then its estimated cost is often higher than its targeted cost. The aim of target costing is to find ways of closing this target cost gap and producing & selling the product at targeted cost.

Query no.3: 

Why target costing is a better place as compare to the traditional costing techniques (cost plus pricing)?

Solution: 

In the past, Product cost is based on its cost which includes non-value added activities. At that time, Effective utilization of resources, Competition among manufacturers, Short life cycle products, High range of products and Use of high tech & Complex manufacturing system was not common and potential customers was not allowed to participate with manufactures regarding the specification of a new products i.e. Customer relationship management (CRM) system. In these days, trend has been changed and it might be due to the customer relationship management where manufacturers & consumers are equally important to consider the importance of values. What they should buy? And why they should buy? Target costing has become a need of modern environment due to shorting product life cycle. Organisations should redesign their products to achieve their desired profit. 

Query no.4: 

How to implement target cost?

Solution: 

In a bullets below:

•  Define product specification and estimated sales volume.
• Set target selling price at which company will be able to achieve desired market share.
• Estimate required profit based on profit margin or Return on Investment (ROI).
• Calculate target cost.

Query no.5: How to calculate target cost?

Solution in the table below:

Details	$
Targeted selling price	X
Less: Desired profit	X
Targeted cost	X

 

Query no.6: How to calculate cost gap?

Solution in the table below:

Details	$
Targeted cost	X
Less: Projected cost	X
Cost gap	X

 

Query no.7: How to implement Reengineering Business Process in order to remove cost gap?

Solution: 

This is the time to take benefits from target costing since Re-engineering process (Value engineering or value analysis) can help to remove cost gap. After redesigning the product structure, if cost gap still exists then renegotiation will be explored with the customer. And if re-negotiations are successful and cost gap has been removed then product will be started to produce otherwise product would not be able to launch in the market.

Query no.8: 

What are other techniques to remove cost gap?

Solution: 

The following below bullets can be used to remove cost gap:

• Remove non-value added activities.
• Reducing unnecessary no. of components.
• Using cheaper staff but it should not affect quality.

• Using standard components wherever possible.
• Acquire new or more efficient technology.

• Training of the staff with more efficient techniques.
• Use different material but no compromise over quality.
• Remove unnecessary costs.