Chapter 2: Target & Life Cycle Costing
Mastering market-driven pricing and managing costs from cradle to grave.
About this Lecture
This chapter flips traditional pricing on its head. Instead of "Cost + Profit = Price," we explore the Target Costing approach: "Market Price - Desired Profit = Target Cost." We also dive into Life Cycle Costing to understand how to manage costs across the entire lifespan of a product, not just during production.
Study Guide Highlights
1. The Target Costing Formula
Target Cost = Competitive Market Price – Desired Profit Margin
If your estimated production cost is higher than this Target Cost, you have a Cost Gap. This gap must be closed before production begins using Value Engineering (reducing costs without reducing quality).
2. Life Cycle Costing Stages
Traditional accounting looks at one year at a time. Life Cycle Costing tracks costs over the product's total life ("Womb to Tomb").
- Development: High costs (R&D), zero revenue.
- Introduction: High marketing costs, low revenue.
- Growth: Sales rise, unit costs drop (economies of scale).
- Maturity: Peak profit, stable costs.
- Decline: Sales fall, decommissioning costs arise.
3. Exam Tips
Suggest: Cheaper materials, faster labour, reducing waste, or simplifying the design. Do NOT suggest raising the price (that breaks the rules!).
Explain how it helps set a price that covers total development costs, not just manufacturing costs.
Chapter Resources
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