ACCT 3105 · Target Costing · Designing to a Market Price

Led by Margaret Vance-Foster Simulacrum

1. Module 5 ○ Open

   Target Costing · Designing to a Market Price

   Led by Margaret Vance-Foster Simulacrum

   The question

   Target costing — the Japanese-developed discipline of designing products to a market-determined price rather than pricing by cost-plus. The module covers the target-cost calculation (market price minus required margin), design-stage cost engineering, value engineering as a systematic challenge of every component, the role of the management accountant inside the cross-functional design team, and kaizen costing through the manufacturing phase. The worked scenario takes a smart-thermostat consumer-electronics startup from a £180 retail price target to a closed cost gap through value engineering and supplier collaboration.

   Outcome

   The student can perform a target-cost calculation, identify the cost gap on a hypothetical design, propose value-engineering responses to close the gap, and explain when target costing is and is not the right pricing/costing discipline. (Target costing)

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   Practice scenarios

   A Smart Thermostat

   You run a target-cost design exercise for a smart-thermostat startup whose product must hit a £180 retail price; initial design cost is £142 against a target cost of £126. The work tests whether you can apply value engineering systematically and run a closing supplier-negotiation step to close the cost gap.

   Your goals

   • Calculate target cost: firm receives £117 from retailers; required margin 40%; allowable cost = £117 × 60% = £70.20 per unit (excluding marketing/warranty), or £64.20 if marketing/warranty is included in cost.
   • Calculate cost gap: current estimate £89 (or £95 incl marketing/warranty) vs target £70.20 (or £64.20). Gap is approximately £19–£31 per unit, i.e. 27–33% of current cost.
   • Identify value-engineering opportunities: which components carry the most cost and which can be redesigned (the WiFi/connectivity module; the display; the housing materials; the sensor selection; the assembly process).
   • Recommend a phased approach: 8-week value-engineering sprint targeting £15/unit reduction through redesign; 8-week supplier negotiation targeting £8/unit through volume commitments and design-for-supply; ongoing kaizen costing post-launch targeting another £5–8/unit over the first 18 months.
   • Frame the recommendation as a 700-word paper for the cross-functional development team.

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