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Hello Sir
Hope you are fine
Sir one of BPP question #59..i am confused on statement 1
which says..
–>Target costing ensures that new product development costs are recovered in the target price for the webcamThis statement is wrong by giving reason that target costing sys may take product development costs into consideration.but recovery of costs is associated more with lifecycle costing..
Sir every product have development cost so we have to recover this cost no mater which costing system we use..
so if we dont consider recovery of development cost in target costing then how we recover??Target Costing concept, deals with a competitive Selling Price at market which drives the whole construction of cost card, in order to obtain a pre-determined desired profit. An estimated cost will probably differ from target cost, and that’s the reason we have to close this gap by the appropriate corrective actions.
For example: Life Cycle Costing concept may give us a full cost of 50,00$ p.u. That’s the DETERMINATION of cost.
Assume desired margin profit is 20%. Then, the selling price must be 60,00$ p.u.
Now, look at Target Costing : Market Price for same products now, is 50,00$ p.u. We can’t charge 60,00$ because of highly elastic demand and competition.
If we want a profit of 20% on full cost, the target cost is 41,67$.
Cost gap is 50-41,67 = 8,33$.For some reasons, we might not reduce any costs, so we have either to charge a lower price or to reduce our desired profit margin.
In any case, Target Costing looks first in suited price for the market, and cost is just a result which derives by calculating your desired profit margin.
Life Cycle Costing, looks first at COSTS, all entire life of product costs, and then is added a desired profit margin which show us the appropriate Selling Price.
A target costing price approach may not ensure that recovery of all costs associated with product is assured.
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