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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.
The 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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