1. What is Target Cost?

Target cost is a cost management tool used in product development and pricing strategy. It represents the maximum allowable cost that can be incurred on a product while still earning the desired profit margin at a specific selling price.

2. How Does the Calculator Work?

The calculator uses the target cost formula:

Where:

• \( Target\ Price \) — The intended selling price of the product ($)
• \( Target\ Profit \) — The desired profit amount ($)
• \( Target\ Cost \) — The maximum allowable cost to achieve target profit

Explanation: This calculation helps businesses determine the cost constraints they must work within during product development to achieve their financial objectives.

3. Importance of Target Cost Calculation

Details: Target costing is crucial for competitive pricing, profit planning, cost control, and ensuring products are developed within financial constraints while meeting market price expectations.

4. Using the Calculator

Tips: Enter target price and target profit in dollars. Both values must be positive numbers, with target profit typically being less than target price for valid results.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between target cost and actual cost?
A: Target cost is the maximum allowable cost to achieve desired profit, while actual cost is the real cost incurred during production. The goal is to keep actual cost at or below target cost.

Q2: When should target costing be used?
A: Target costing is most effective during product development phases, for new product introductions, and when entering competitive markets with established price points.

Q3: Can target cost be negative?
A: No, target cost should not be negative. If target profit exceeds target price, it indicates an unrealistic profit expectation that needs adjustment.

Q4: How is target profit determined?
A: Target profit can be based on desired return on investment, industry benchmarks, company profit goals, or percentage of target price (profit margin).

Q5: What if actual costs exceed target cost?
A: If actual costs exceed target cost, companies may need to redesign the product, find cost savings, accept lower profits, or reconsider the target price in the market.