Target costing template

In tough times, calculating your prices by adding a profit margin to cost can result in your products becoming uncompetitive. However, you might be able to beat your competition by using target costing to help set prices.

What is target costing?

Target costing starts with a desired sales price from which the required profits are deducted to result in a target cost. The company must then produce the item for a cost no greater than this. Your role will be key in ensuring that the initial target cost is realistic and that the product or service continues to be produced at or below this figure.

Product design and processing

Target costing is usually most suited to new products or services because its impact is maximised by considering how design and manufacture costs can be minimised.

However, it can be adapted for existing products and services especially where there is scope for design change, buying components or labour more cheaply or changes to the production process.

Start target costing by researching a competitive range of market prices. You will probably need to involve the sales and marketing teams in this process. Once you have your target sale price, discuss with management what is an acceptable profit margin and set the cost target. Initially, this should be set more aggressively than you need it to be. Focus on cost savings through product design and the production process using our Target Costing Template.