Elucidate the steps followed in Target Costing.

Target Costing: Steps and Process

Target costing is a cost management strategy used to determine the cost at which a product must be produced to generate a desired profit margin. It involves a series of steps to identify cost targets, analyze costs, and make necessary adjustments to meet those targets. Here are the key steps followed in target costing:

1. Market Analysis: The first step in target costing is to conduct a thorough market analysis to understand customer needs, preferences, and willingness to pay. This helps in determining the target selling price for the product.

2. Determine Target Profit Margin: Based on market analysis and the company's strategic objectives, a target profit margin is set. This margin represents the desired profit that the company aims to achieve from the sale of the product.

3. Calculate Target Cost: The target cost is calculated by subtracting the target profit margin from the target selling price. This target cost represents the maximum allowable cost for producing the product while still achieving the desired profit margin.

4. Value Engineering: Value engineering involves analyzing the product design and production processes to identify opportunities for cost savings without compromising quality or functionality. This step aims to reduce costs to meet the target cost.

5. Cost Analysis: A detailed cost analysis is conducted to identify the components of the product and their associated costs. This helps in understanding where costs can be reduced or eliminated to meet the target cost.

6. Cost Reduction Strategies: Based on the cost analysis, cost reduction strategies are developed and implemented. This may include sourcing cheaper materials, improving production efficiency, or redesigning the product.

7. Continuous Monitoring and Improvement: Target costing is an iterative process that requires continuous monitoring of costs and performance against targets. Any deviations from the target cost are identified, and corrective actions are taken to ensure that the target cost is met.

8. Final Cost Determination: Once all cost reduction strategies have been implemented, the final cost of the product is determined. This cost should be equal to or lower than the target cost to ensure that the desired profit margin can be achieved.

In conclusion, target costing is a systematic approach to cost management that helps companies design and produce products that meet customer expectations while achieving desired profit margins. By following these steps, companies can effectively manage costs and improve profitability.