Before discussing how cost accountants setup target costing; what is the so-called target costing? You may ask. Let me tell you in short words: target costing is a costing methodology that uses preset cost—that is charged into products—before it’s actually happened. The preset cost, in this particular method is called target cost.

Target costing is highly recommended to any company that designs its own products, since it can result in significant reductions in product costs even before they’re actually incurred, when the design is completed. But there is the downside; it requires extensive labor work of the cost accountants.

Unlike other costing methodologies where a cost accountant collects, populates, calculates and charges costs when they’re incurred in production—so that managers will find out what a product costs after it is too late to make any changes to the design, in target costing system a team of cost accountants are required to get involved since the product design process—with the intent of creating products that meet certain target cost. Using the target costs, all activities—in the production area—are driven into one direction; the margin goal. So, how cost accountants setup target costing? I am going to outline the setup—in a step-by-step manner, through this post. But before the steps, let’s have a look at cost accounting in general. Read on…