Many companies are facing pressure from customers and competitors to keep prices low. Customers threaten to stop buying and sponsoring competitors if the company raises prices. These companies may also face rising costs, reducing their profit on each item sold. Develop different tactics in order to increase your profits. Some use a target costing strategy to increase their profits without affecting the price, just like creating promotions and so on. In this article, we will talk about the target costing. What it is and how it is used. Companies receive several benefits of using this approach.
The target implies a reverse costing analysis of the product, based on the sale price. The company considers the expected price for each unit and desired profit on the subject. Subtract the desired benefit of the selling price to determine the target cost per unit. It brings together representatives of various departments to participate in a team to achieve the target cost. Team leader begins with the information on the actual cost and calculated the amount of cost that needs to be removed. Overall, the team comes up with ideas to reduce costs and reach the goal.
Proactive approach to cost
One of the benefits of target costing falls on the side of proactively focusing on the price. By applying a strategy of target costing, the team aims to reduce the cost of the product before the company starts losing money. This reduces the total losses suffered by society. The alternative, less beneficial approach is reacting to pressure from customers and focus on cost reduction after the company starts losing money.
Another benefit is the target costing process improvement resulting from the team’s efforts. Target costing teams considered material costs, labor requirements and processes. Teams often find inefficiencies in current processes and recommend improvements that increase efficiency and reduce costs. These improvements are applied to the target product and other products using the same process. By improving processes, the company reduces costs in other product lines as well.
Collaboration between departments
Target costing teams require employees from different departments collaborate in finding ways to reduce product cost. These employees learn about the activities carried out in other departments and how their actions affect others. They learn to appreciate the business landscape and build relationships that transfer to future projects.