Chapter 2: Target Costing and Life Cycle Costing

Study Guide Highlights

Target costing and cost gaps

Target costing starts with the market and the return the organisation requires, rather than with an internally calculated cost followed by a mark-up. The chapter explains the role of the target cost and the significance of any gap between that target and the current expected cost. Closing that gap is treated as a design and management challenge, not simply as an instruction to spend less.

Cost reduction and customer value

Cost reduction is considered alongside value analysis and value engineering. Changes made while a product is still being designed are distinguished from analysis of an existing product, with attention kept on features that customers value. Broader routes to cost advantage are also discussed, including scale, learning and product design, without treating lower cost as worthwhile if quality or customer value is damaged.

Whole-life cost perspective

Life cycle costing widens attention beyond a single accounting period. Costs can arise before production begins, during manufacture and sale, and after the customer-facing phase has ended. Major cost commitments are often made early in a product's life, so managers need to consider spending and commitments across the whole life rather than judging performance from one year in isolation.

Forecasts across the life cycle

Forecasts are assessed in the context of the product life cycle and the environment in which the product competes. Growth, maturity and other stages can change the relevance of past trends, while promotion, competitor behaviour, external events and the quality of available information can affect reliability. A mathematically correct forecast is therefore treated as something that still needs judgement before it is used for planning.