Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Target cost

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- September 11, 2021 at 7:53 pm #635536
Please help me understand the Steps of target costing and correct me if I am incorrect.

Step 1 : Determine target selling price for the exisiting product which company is deciding to produce

Step 2 : Calculate the profit margin on selling price but please tell me how can we calculate the required return on investment (is there any formula for this)?

Step 3 : Calculate target cost for actual product

Step 4 : Compare Target cost with the estimate cost of another similar product to compare with our exisitng product.

And the target cost should be less than estimated cost to produce the product.

September 12, 2021 at 8:47 am #635566The steps are correct except that in step 4 we do not compare with a similar product. We estimate the production cost and compare with the target cost. It the estimated production cost is higher than the target cost then we look for ways of reducing it.

There is no formula for determining the required profit. It is up to the company to decide on its policy for determine the profit required and this will be given in the question.

Do watch my free lectures on this. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.

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