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Target costing is a technique that help us finding maximum cost that we need in order to achieve our objective which is setting specific % of gross profit.
[Expected actual cost] OR [Estimated actual cost] is what we expect the cost to be in the future for our product which we are thinking to produce because we haven’t made the product yet. Expected Actual cost is set by gathering a same or similar product being sold in the market (i.e. market research) that could help us choosing expected cost for our product.
We then compare our target cost with estimated actual cost to see whether the expected actual cost which we were expecting to be is the same as compared to the target costing approach or not.
Cost gap = Target cost – Expected Actual cost
[If Expected Actual cost is greater than Target cost then we need to find ways to reduce our expected actual cost]
Is that all okay?
That is all OK.
Is it correct that our aim is to reduce cost gap which can be done by reducing expected actual cost so that we’ll have equal cost as compared to target cost which can be done by following ways:
1) Reduce material costs; Reduce labour costs
2) Less wastage; Poor quality material
3) Acquiring new technology such as new machinery to work faster
4) Employ Skilled Labour
5) Increase Learning rate and Reduce Labour inefficiencies
6) Cost reduction techniques
7) Value engineering which is a cost reduction technique by having less cost but high value for the product
Yes – those are all potential ways of reducing the cost (although your (6) effectively covering all the others!)