Target costing and cost plus pricing

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.

Target costing and cost plus pricing

Ahmed Farghaly Presented By: It can be considered as an alternative paradigm to traditional cost-based accounting systems. It works, in a cross functional way, from the design stage throughout all the product life cycle and it involves the entire value chain.

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The process implementation needs a costing methodology consistent with the cost management logic. When the supply of the good outstrips customer demand, prices set on a cost basis can render the product uncompetitive.

In such scenarios, pricing policies should be the related to external factors. To obtain margins that adequately exceed costs, firms must revise their logic and begin to manage costs as a function of an exogenous variable, i.

The opportunity to use target costing depends not only on the characteristics of the market where the company operates but also on the characteristics of the production process and the product. The methodology is used mainly in manufacturing companies and is particularly suited, as Sakurai stated Sakurai, Whether the methodology is adopted or not depends on the complexity of the product portfolio: Traditional Costing System4, Historically, manufacturing and cost accounting became so linked because of the necessity to determine profit on goods produced, sold and shipped.

Course: BUS Managerial Accounting

Early decisions made within this relationship fostered a certain benchmark or standard upon which most of the manufacturers in the earlier times will use as method. In the past, using direct labor as basis for the computation of overhead costs to be charged on the products manufactured would make sense, since it has contributed to the largest percentage of the cost that was expended in manufacturing products such as, automobiles, trains, garments, etc.

This procedure of allocating costs incurred in production, other than direct materials and direct labor costs was known as the traditional costing method. Despite the fact that it is over 75 years old, most companies still use standard cost systems to value inventory for financial statement purposes and for many other management purposes as well.

This standard cost system has some advantages for financial statement purposes e. However, in this modern times where the way we do business have changed, insisting on the use of the traditional costing system would be misleading as a tool to assist in making effective management decisions.

The traditional costing system worked well until the business environment changed. About 20 years ago, most of the manufacturing firms began adopting changes in their operations, which were not consistent to traditional costing method.

Target-Costing Benefits

Automated equipment and robotics are just some of the many current discoveries that lessened the use of manpower, thus, minimizing direct labor costs.

Under the traditional costing system, adhering on the use of direct labor as an allocation base for overhead or indirect costs distorts product cost computation. The traditional cost accounting is becoming ineffective if not obsolete in the current global competitive world of business.

The business scenario in the olden times for which it was developed and used is no longer the current business trend. Using standard cost, which is the one being advocated by traditional costing system was designed for a company that had: Many manufacturing companies are still arbitrarily attaching overhead to products using direct labor as the basis.

These companies often allocate the largest cost i. Because of product variety and product line complexity, using one homogeneous overhead rate which is being utilized under traditional costing system, is no longer an appropriate average.

Lastly, the modern business environment today, is now characterized by high technology, high-speed, state-of-the-art data collection and reporting systems.sunk cost. J. target costing. K. theory of constraints (TOC) L. total cost concept. M. variable cost concept ____ 1.

A concept used in applying the cost-plus approach to product pricing in which only the costs of manufacturing the product, termed the product cost, are included in the cost amount to which the markup is. cost-plus pricing method has been criticized by many researchers and practitioners, and changed with market-oriented pricing method.

Meanwhile, there is a consensus among researchers and . price that was based on a cost-plus calculation.

Target costing and cost plus pricing

Target costing turns the process around by starting at the market price of the product and subtracting a target profit from this price to arrive prevent pricing errors and aid in faster and more focused product developments. 2. Traditional Pricing and Costing.

Target costing's wiki: Target costing is an approach to determine a product’s life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit.

Cost-plus pricing method is based on accounting data for total cost and not the opportunity cost that the sale of product incurs.

Target Costing at ITT Automotive

6. This method cannot be used for price determination of perishable goods because it relates to long period. Lean Accounting does not require the traditional management accounting methods like standard costing, activity-based costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely & confusing financial reports.

These are replaced by.

Pricing Strategy