A business company always has maximizing of profits on top of its priorities; utilizing minimal resources, operating at minimal costs and increasing the returns. According to Trench (2001), target costing is a business accounting approach where a set desired profit margin subtracts from a competitive price in the market; while the quality and functionality of this particular product maintain, the company ensures achievement of the profit you want at the end of the period. A target cost is, therefore, the maximum cost that a company can incur as expenses in the production of a product but still maintain the profit value at a known selling price.
Target costing approach transfers the decision and all pressure from the product level on completion to the component level where the designers and suppliers are the main players. The method entails cost control and planning in all the product's life cycle with regards to the set target cost according to the market selling price. In as much as target costing helps to cut on the expenses of production, it is not the ultimate objective of a business company; target costing helps an organization to achieve the desired level of cost reduction.
It is necessary for a company to manage its various costs before production process of a product begins; this is because approximately 80% of costs in products are in the design phase, it, therefore, makes it the best opportunity for a business to achieve a particular price level (Trench, 2001). Target costing is, therefore, relevant to the product's life cycle; from the conceptual stages to the releasing for manufacturing. The key role is in this phase where the designers have to work with figures that they anticipate to achieve after sales while considering the level of quality and functionality.
Costs are among several other factors that influence location decisions of a company. The management of a company, for instance, has to estimate land costs which involve property rates in the geographical area of interest with regards to target costs at the end. Utility costs which include water, gas, sewage, electricity, and phone bills vary from place to place; these are also necessary for the establishment of any business company hence fixed costs. It is, therefore, important to estimate these utilities about land rates in different geographical areas before a company settles on a place; it is for the long term good of an organization to achieve their respective goals and primarily make profits.
References
Trench, D. (2001). On target: A design and control target cost . London: T. Telford.
