Target costing

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The traditional cost approach, i.e.'cost plus pricing' is inappropriate for today's liberalized environment. In traditional cost system,material, labour and overhead costs are measured and a desired profit is added to determine the selling price. The need has arisen to apply the technique named as target costing which has been widely used by Japanese firms since 1970s and which has recently received a considerable attention in the U.S.A. and European accounting literature. Target Costing 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. It is that estimated cost which enables a firm to remain and compete in the market in the long-run.