Target costing aims at comprehending and formulating the two most essential parts of any business plan: the market and the costing. The costing of products pauses a challenge for most companies. Target costing foresees that companies reap a reasonable profit margin in relation to the cost production. The market determines the failure or a success of a product. Prior to designing a product, it is essential that a company determine the need of a product. Demand determines pricing and the quantity of product. It is highly essential that a company observe the market and the costing. Failure to do so will definitely culminate to the failure of the market. Product design is a critical stage of any business venture. This is because it is impossible to reverse a finished product. Target costing allows companies to determine the price of the product prior to production (Clifton, 2008).
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Target pricing ensures that the quality and design of a product corresponds to its pricing. For instance, a product designed for the masses will require less inexpensive resources to produce while a high product targeting the upper class, elite socialite class require quality in resources used. Therefore, a high product will cost more in production consequently pricing higher in comparison to a mass product. Target costing ensures that companies do not incur losses this is because the pricing of a product corresponds to costing (Dhillon, 2004). Statics indicate that some unique product fails to last in the market because of lack of planning during the development (Clifton, 2008). This is because the company failed to determine the price of the good prior to production. Unknown to many people, this is the principal underlying reason behind most seasonal products (products that only last for a certain period then disappear). In order to meet the market demand, it is essential that a company reap profit from the sale of products to invest into production. However, non-profitable ventures lead to no business hence the product fails to last long in the market. Target costing differs from other product development strategies because it first determines the target cost prior to product design (Needles, 2010).
In the case of AB a pharmaceutical company, application of target costing, ensures that the company determines the price of the drugs prior to drug development. Under target costing, the AB pharmaceutical company has to determine the market niche for the specific drugs it wishes to produce. Moreover, the company has to establish an outstanding factor that distinguishes the drugs it produces from other drugs on the shelf. Prior to developing the drugs, the company has to estimate the price of the drugs after production. It is essential that the company indicate the profit margin it wishes to attain after the distribution and sale of drugs. After this, the pharmaceutical will employ both the target cost and interest on capital to determine the development cost of each drug. Target costing ensures that the company remains within budget during the development stage. This business approach guarantees that no drug price is less than it product cost (Dhillon, 2004).
Just as the name, suggest Life- cycle costing focuses on all phases of a product. Unlike other costing approaches life cycle costing focuses on the money aspect of product of the research all the way to production, marketing and distribution sale and postproduction. Unlike target costing, life cycle costing analyses and determines the pre-production phases of a product. Pre production involves research and other related activities that lead to the birth of a concept (Kirkham, 2006). Life cycle figures that most costing of a product occurs during the pre-production phase. This type of costing approach aims at streamlining and reducing the amount of expenditure prior to production of the product. Moreover, other costing approaches focus on costing until production of the good. However, life cycle costing also lays emphasizes on monetary ventures after post production. Such ventures include: sales and marketing distribution, warranty cost, customer and the final sale of the product (Kirkham, 2006).
Whereas other costing strategies aim to reduce costs only at the production stage, Life-cycle aims at reduction of expenditure at all phases of the product. Life cycle costing significantly relates to value engineering. Value engineering refers to the methodology applied to attain target cost. The methodology streamlines all phases of a product. Value engineering methodology aims at removing steps that do not enhance the value of products and promotes activities that contribute to cost reduction (Farr, 2011). Research reveals that life cycle costing is so far the best planning method prior to the production of a product. In applying the methodology, production managers need to determine the cost of the product from the initial phase until the postproduction phase. Then, the production managers divide the production cost with the number of units anticipated for production. The results attained indicate the cost value of each product (Farr, 2011).
Life cycle costing assists managers to determine a realistic perception of the total production costs and make adjustments where necessary. However, managers need to implement this method at the birth of a concept or during the production phase. Implementation of this method subsequent to the production of the product will have no impact on the general outcome of the business. The life –cycle costing will assist AB Company to determine the cost of the drugs prior to the design. Moreover, life costing cycle allows the pharmaceutical company to identify and eliminate unnecessary procedures that increase the cost of the overall products.
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