Target costing - part 1

In this lesson

1. 0:00 Why Target Costing matters today
2. 1:46 Traditional approach to product costing
3. 2:42 Limitations of traditional cost control
4. 3:56 How Target Costing reverses the process
5. 4:43 Target Costing step-by-step methodology
6. 6:52 Identifying and closing the cost gap

About this lesson

Target costing is crucial for CIMA Performance Management (PM) and Management Accounting (MA) papers, where you'll need to understand how businesses use market-driven pricing to manage profitability in competitive environments with shorter product lifecycles. You'll discover why target costing matters in today's business world. With product lifecycles now lasting just 1-2 years and design decisions dictating up to 80% of production costs, the traditional approach of developing a product, estimating its cost, then adding profit to set the price is no longer fit for purpose. Target costing reverses this logic: it starts with what customers will pay, subtracts a desired profit margin, and works backwards to determine the target cost the business must achieve. The video walks you through the core steps of target costing. First, you develop a product concept with input from across the organisation. Next, you determine the target price customers are willing to pay by analysing both customer demand and competitor positioning. You then establish your target profit based on risk and return requirements. With target price and target profit defined, you calculate the target cost—the maximum you can spend to produce the product while hitting your profit goal. Finally, you identify whether a cost gap exists by comparing your expected production cost against the target cost. If a gap exists, you work proactively with teams across design, production, and finance to close it before production begins. This proactive, externally-focused approach contrasts sharply with traditional reactive cost control, where corrective action happens only after overspends occur. Understanding target costing gives you a strategic tool for managing product viability and profitability in fast-moving markets.

Duration: 8m