Enter the target selling price value.
Enter the desired profit value.
Enter the sales volume.
Enter the fixed costs value.
Enter the variable costs value.
History:

Explanation

What is Target Costing?

Target costing is a pricing strategy used by businesses to determine the maximum allowable cost for a product, ensuring that it can be sold at a competitive price while still achieving a desired profit margin. This approach is particularly useful in highly competitive markets where price sensitivity is high.

How to Calculate Target Cost?

The target cost can be calculated using the following formula:

Target Cost (TC) is defined as:

§§ TC = Target Selling Price (TSP) - Desired Profit (DP) §§

where:

  • § TC § — Target Cost
  • § TSP § — Target Selling Price
  • § DP § — Desired Profit

This formula helps businesses understand how much they can spend on producing a product while still meeting their profit goals.

Key Components of the Target Costing Calculator

  1. Target Selling Price (TSP): The price at which the product is intended to be sold in the market.

    • Example: If a company plans to sell a product for $100, this value will be entered as the target selling price.

  2. Desired Profit (DP): The profit that the company aims to achieve from the sale of the product.

    • Example: If the desired profit is $20, this value will be entered as the desired profit.

  3. Sales Volume: The number of units the company expects to sell.

    • Example: If the expected sales volume is 1000 units, this value will be entered as the sales volume.

  4. Fixed Costs: Costs that do not change with the level of production or sales, such as rent, salaries, and insurance.

    • Example: If the fixed costs amount to $500, this value will be entered as the fixed costs.

  5. Variable Costs: Costs that vary directly with the level of production, such as materials and labor.

    • Example: If the variable cost per unit is $30, this value will be entered as the variable costs.

Example Calculation

Let’s say a company has the following values:

  • Target Selling Price (TSP): $100
  • Desired Profit (DP): $20
  • Sales Volume: 1000 units
  • Fixed Costs: $500
  • Variable Costs: $30 per unit

Using the formulas, we can calculate:

  1. Total Costs (TC): §§ Total Costs = Fixed Costs + (Variable Costs × Sales Volume) §§ §§ TC = 500 + (30 × 1000) = 500 + 30000 = 30500 §§

  2. Target Cost (TC): §§ TC = TSP - DP §§ §§ TC = 100 - 20 = 80 §§

  3. Profit Margin: §§ Profit Margin = \frac{DP}{TSP} \times 100 §§ §§ Profit Margin = \frac{20}{100} \times 100 = 20% §§

When to Use the Target Costing Calculator?

  1. Product Development: When designing new products, businesses can use this calculator to ensure that the product can be produced within the target cost while achieving the desired profit.

  2. Pricing Strategy: Companies can evaluate their pricing strategies based on market conditions and cost structures.

  3. Cost Management: This calculator helps in identifying areas where costs can be reduced to meet target costs.

  4. Financial Planning: Businesses can use this tool for budgeting and forecasting future profits based on expected sales volumes and costs.

Practical Examples

  • Manufacturing: A manufacturer can use this calculator to determine the maximum cost they can incur to produce a new gadget while ensuring a profit margin.
  • Retail: A retailer can assess whether the selling price of a product allows for a sufficient profit after accounting for all costs.
  • Service Industry: A service provider can calculate the target cost of delivering a service to ensure profitability.

Definitions of Key Terms

  • Target Selling Price (TSP): The price at which a product is intended to be sold.
  • Desired Profit (DP): The profit amount that a business aims to achieve from a sale.
  • Fixed Costs: Costs that remain constant regardless of the level of production or sales.
  • Variable Costs: Costs that fluctuate based on the level of production or sales.

Use the calculator above to input different values and see how the target cost, total costs, and profit margin change dynamically. The results will help you make informed decisions based on your business data.