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Hi Tutor,
Could you kindly tell is there a difference between ”cost targets” and ”target costing”?
Because the question has given a forecasts of manufacturing cost targets and the cost of the qualtiy and the requirement is to explain how the cost targets could be of assistance to the company with regards to their application for platinum status.
Examiners report says the question is not asking for target costing.
Thanks.
Target costing usually arises from pricing. A company is selling into a competetive market and has to sell at thw market price. If it wants to make a specific profit margin then it will have to make the product at a specific cost. That becomes the target cost. If actual costs are higher than the target there is a cost gap that has to be closed.
A cost target can arise from a number of reasons. As above, it can arise for a whole product from a price target, but it can also arise from, for example achieving efficiency and waste targets. For example, management could specify that waste cost should be no more than 0.5% of total material costs. Or, perhaps there could ne overtime cost targets to encourage efficiemt use if staff.
Most operational parts of organisations incur costs so imposing cost targets puts pressure on managers to behave in certain ways.
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