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A potential benefit of target costing is that it establishes a maximum cost if the desired profit margin is to be achieved.
I was attempting mock test in opentuition and I was a bit confused about this statement. Could you help me with this?
Thank you. Have a great day.
Have you not watched my free lectures on target costing, because this is the main purpose of target costing!!!
We determine a realistic selling price and a target profit margin. From this we determine the target cost, which is by definition the maximum cost in order to achieve the target profit.
We then compare the currently budgeted cost with the target cost, and if it is higher look for ways of reducing the cost down to target (i.e. ways of eliminating the cost gap).
Do watch the lectures. They are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
Thank you so much for the reply. I got a bit confused because while we select a sales price, which would be either the competitive or the market price, we would then end up with a cost after accounting for our target margin which might be lower than the cost we have either incurred or budgeted.
Since it was referred as “maximum” cost, I guess my attention got a bit caught up there as to why the cost should be maximum when it really gives a low cost amount despite the real cost.
I’m sorry I didn’t watch the lecture because I tried to find MA lecture for alternative costing.Once again thank you for helping us. We can’t tell you how happy we are to be a part of opentuition and how opentuition has helped us in our studies. We are really overwhelmed. You and your team have made our lives easier, it means a lot to us. 🙂
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