Target costing

Target costing is reversible cost accounting technique. Instead of calculating costs first and then setting the price based on these calculated costs, target costing does it the other way around. Target costing is convenient for firms operating in perfect competition. The steps in Target costing are as follows: 1. Determine the price consumer is willing to pay for the product, say $Z. This may be arrived at after conducting a market research; 2. Determine the profit margin the business is willing to accept, say X% of Z; 3. On subtracting the above two, i.e., $Z minus (X% of Z), Target cost is determined.