CIMA P2 Syllabus A. Managing The Costs Of Creating Value - Deriving a Target Cost - Notes ^{1 / 7}

A target cost is what's left over after you've subtracted your desired profit from your competitive selling price.

A product of acceptable quality is then designed within that cost.

Therefore, the main focus of target costing is not finding what a new product does cost but what it needs to cost.

Steps In Target Costing

1. Choose an appropriate Selling Price

   Looking at competitors prices / products

2. Choose a desired Profit Margin

3. This leaves the Cost Target

4. Calculate the Cost Gap

   This is the Current costs - Target costs

   This gap would have to be closed, by some form of cost reduction (for e.g. value engineering), while satisfying the needs of customers.