Q19-12RQ - Horngren'S Financial And Managerial Accounting

Question

Explain the difference between the target price and target cost.

Step-by-Step Solution

Answer

Target price is related to the customer’s will to pay for the project and the target cost is the maximum cost that a business incurs to achieve the target price keeping in view of desired profit. 

Target price

Target price is the amount of price that can be willfully paid by a customer for a product or service. It is the price above which the demand for the product starts declining. In value engineering, this price is used as a yardstick to compute cost

Target cost

Target cost is the maximum cost that a business must maintain to get the desired profit. If the cost goes above the target cost level, then the desired net profit can not be achieved. This is so because due to the increased cost, the sales process would also increase, and thus the demand for the product or service would decline – generating fewer sales revenue.

 

Difference between the target price and target cost

The difference between the target price and target cost is the amount of desired profit. If the desired profit is deducted from the target price, it would produce the target cost