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What is the difference between target costing and life cycle costing?
Wiki User
∙ 9y ago
In Target costing system, comapnies tries to achieve target prices by reducing those parts of activity which are not increasing the value of product.
Life cycle costing is a concept in which companies tries to read the overall process of development of product life cycle and tries to minimise the cost at area where it is not required or not increase the value of product.
Wiki User
∙ 9y ago
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What is target costing process?
Target costing is a pricing method used by firms. It is defined as "a cost management tool for reducing the overall cost of a product over its entire life-cycle with the help of production, engineering, research and design". A target cost is the maximum amount of cost that can be incurred on a product and with it the firm can still earn the required profit margin from that product at a particular selling price.In the traditional cost-plus pricing method materials, labor and overhead costs are measured and a desired profit is added to determine the selling price.Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price.To compete effectively, organizations must continually redesign their products ( or services) in order to shorten product life cycles. The planning, development and design stage of a product is therefore critical to an organization's cost management process. Considering possible cost reduction at this stage of a product's life cycle (rather than during the production process) is now one of the most important issues facing management accountants in industry.Here are some examples of decisions made at the design stage which impact on the cost of a product.The number of different componentsWhether the components are standard or notThe ease of changing over stoolsJapanese companies have developed target costing as a response to the problem of controlling and reducing costs over the product life cycle.
What are the Principles of target costing?
1. Price-led costing. Market prices are used to determine allowable--or target--costs. Target costs are calculated using a formula similar to the following: market price - required profit margin = target cost.2. Focus on customers. Customer requirements for quality, cost, and time are simultaneously incorporated in product and process decisions and guide cost analysis. The value (to the customer) of any features and functionality built into the product must be greater than the cost of providing those features and functionality.3. Focus on design. Cost control is emphasized at the product and process design stage. Therefore, engineering changes must occur before production begins, resulting in lower costs and reduced "time-to-market" for new products.4. Cross-functional involvement.Cross-functional product and process teams are responsible for the entire product from initial concept through final production.5. Value-chain involvement. All members of the value chain--e.g., suppliers, distributors, service providers, and customers--are included in the target costing process.6. A life-cycle orientation.Total life-cycle costs are minimized for both the producer and the customer. Life-cycle costs include purchase price, operating costs, maintenance, and distribution costs.
How long is the cycle of a credit card bill?
A credit card cycle ranges between approximately 29-31 days. Your billing statement should indicate the cycle open and close dates, which will tell you exactly how many days are in that particular cycle.
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The Actual overhead is calculated throughout the Production cycle for indirect cost associated to the production and the overhead costs applied is based on the fixed rate assigned against the machine or labour hours to be calculated for the difference b/w two are called under or over applied.
What are the different between an operating cycle and a cash conversion cycle?
Operating cycle is the period in which company purchase raw material and good manufactured from that raw material while cash cycle is investing cash in inventory to manufacture the goods and selling the goods and earning cash from that sales and after that collecting cash from debtors.
What a comparison and contrast between target costing and life cycle costing?
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In target costing the costs is determined by finding out how much the customers are willing to pay for the service or product. The selling price is adjusted for the profit which determines the cost at which the product or service should be produced. When the target cost is less that the actual costs then decisions needs to be made to reduce the costs. For example the remove non value adding features to the product or service. Kaizen costing involves the continuous addition of small costs to the product or service until it meets its desired level for the customer. Target costing can said to be retrospective costing whilst kaizen is prospective costing.
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