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Target costing: definition & important aspects for buyers
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Target costing in a nutshell:
Target costing is a retrograde calculation method in which the permissible costs of a product are determined based on the maximum achievable market price. For purchasing, this means the strategic task of selecting suppliers and components in such a way that the specified target costs are achieved while complying with quality requirements.
Example: When developing a new smartphone, a market price of EUR 599 is targeted, which, after deducting the profit margin (20%) and other costs, results in a maximum budget of EUR 180 for material costs, which the purchasing department must adhere to through targeted supplier selection and negotiations.
Contents
Introduction to target costing
What is target costing?
Target costing, also known as target costing, is a market-oriented method of cost management. It aims to control the manufacturing costs of a product as early as the product development phase in such a way that a previously defined market price and the targeted profit margin are achieved. The focus here is on customer requirements and competitive conditions in order to design products that are cost-efficient and meet demand.
Basic principles of target costing
Significance for purchasing
- Cost reduction: Purchasing identifies cost-effective procurement sources and negotiates prices in order to achieve the target costs
- Supplier integration: early involvement of suppliers in the development process promotes innovation and cost savings
- Competitive advantage: Purchasing contributes to the company's competitiveness through efficient cost management
- Quality assurance: balance between cost reduction and compliance with quality standards
Practical application in the procurement process
In target costing, Purchasing works closely with other departments to achieve the target costs. Through market analyses and price negotiations, Purchasing helps to ensure that materials and components are procured at optimal conditions. It also plays a key role in selecting suppliers who are willing to participate in joint cost reduction programs.
Advantages of target costing at a glance
- Market-oriented product development: products meet customer needs and are attractively priced
- Efficient use of resources: avoiding unnecessary functions and costs
- Improved collaboration: promoting teamwork between departments and with suppliers
- Long-term cost benefits: Sustainable reduction of production costs through continuous optimization
Application of target costing in purchasing
Target costing is a method in which the maximum permissible costs for a product are determined backwards from the price achievable on the market. The aim is to ensure profitability through cost management in the development phase.
Calculation example
Initial situation:
Planned sales price of a new product: € 200
Targeted profit margin: 25%
1. calculation of the target profit:
Target profit = sales price × profit margin
Target profit = 200 € × 25% = 50 €
2. determination of the target costs:
Target cost = sales price - target profit
Target cost = 200 € - 50 € = 150 €
Application in purchasing:
Purchasing must now ensure that procurement costs do not exceed the target cost of €150. This can be achieved by negotiating with suppliers, searching for alternative materials or optimizing processes. For example, the unit price can be reduced by bundling orders or the selection of materials can be made more cost-efficient through design-to-cost measures.
Evaluation of target costing in purchasing
1. strategic advantages of target costing for purchasing
Target costing enables purchasing departments to proactively contribute to the strategic direction of the company. By being involved in the product development process at an early stage, purchasing can influence design decisions and ensure that supplier relationships are utilized optimally. This leads to:
- ✓ Long-term competitive advantage: Products are manufactured at costs that increase competitiveness on the market.
- ✓ Market positioning: Attractively priced products strengthen the company's position in the market and increase customer satisfaction.
- ✓ Strategic supplier partnerships: Closer cooperation with suppliers promotes innovation and creates synergies.
Conclusion on target costing
ConclusionTarget costing is an indispensable tool of modern purchasing, which sustainably strengthens the competitiveness of the company through its market-oriented approach. Systematic cost control as early as the development phase, combined with close cooperation between purchasing, other departments and suppliers, enables efficient product design at optimum cost. The combination of customer requirements and economic objectives is particularly valuable, ensuring both customer satisfaction and profitability.
