TARGET

13
COSTING

Learning objectives
After studying this chapter students will be able to understand the:
1. Target costing and its process.
2. Computation of target cost gap.
3. How to remove or close target cost gap?
 CHAPTER 13: TARGET COSTING

LO 1: Target Costing and its process

1.1) Definition of Target costing

Target costing is profit management technique in which cost is reduced during

design stage of new technology based products.

1.2) Comparison of Traditional approach and Target costing approach

TRADITIONAL APPROACH TARGET COSTING APPROACH

Mark up
(2nd) Mark up
(2nd)

Sale
price Sale
Cost price
(1st) (3rd)
Cost (1st)
(3rd)

In traditional costing, cost is determined first and profit is added to set sale price but in target costing
approach sale price is determined first and profit is subtracted to determine required or target cost.
1.3) Process of Target costing
The elements in the target costing process are shown in the diagram below:

2 4 6

REQUIRED CURRENT CLOSE

PROFIT COST THE GAP

Sales Product
Volume Specification
TARGET
COST GAP

ESTIMATE TARGET
5
SALES PRICE COST

1 3
 CHAPTER 13: TARGET COSTING

LO 2: Target cost Gap

It involves three steps:
Step 1: Computation of target cost per unit
Rs.
Estimated selling price per unit X
Less: Required profit per unit (X)
= Target cost per unit X
Step 2: Computation of current expected cost per unit
Rs.
Direct material cost X
Add: Direct labour cost X
Add: Direct expenses X
Add: Factory overheads
Variable FOH cost
(Variable FOH rate per hour x Labour hours per unit)
X
Fixed FOH cost
(Fixed FOH rate per hour x Labour hours per unit)
X
Add: Any other given cost X
= Current expected cost per unit X
Step 3: Computation of Target cost gap per unit
Rs.
Current expected cost per unit X
Less: Target cost per unit (X)
= Target cost gap per unit X
Example 1 Target cost gap
Packages Ltd. is considering whether or not to launch a new product. The sales department has
determined that a realistic selling price will be Rs. 20 per unit. Packages Ltd. have a requirement that
all products should generate a gross profit of 25% of selling price. Following information pertains to
the current expected cost per unit of new product:
Material cost per unit 2 kgs @ Rs. 5 per kg
Labour cost per unit 1.5 hours @ Rs. 4 per hour
Variable overhead cost Rs. 1 per hour
Fixed overheads cost Rs. 0.75 per hour
Required: Calculate the target cost gap per unit for new product.
Example 2 Target cost gap
Packages Ltd. is considering whether or not to launch a new product. The sales department has
determined that a realistic selling price will be Rs. 50 per unit. Packages Ltd. have a requirement that
all products should generate net profit margin equal to 20% to cover production and non-production
cost. Following information pertains to current expected cost per unit of new product:
Material cost per unit 2.5 kgs @ Rs. 5 per kg
Labour cost per unit 3 hours @ Rs. 4 per hour
Variable overhead cost Rs. 2 per hour
Fixed overheads cost Rs. 1 per hour
Administration cost 10% of production cost
Selling cost 10% of sale price
Required: Calculate the target cost gap per unit for new product.
 CHAPTER 13: TARGET COSTING
Example 3 Target cost gap

Packages Ltd. is considering whether or not to launch a new product. The sales department has
determined that a realistic selling price will be Rs. 25 per unit. Packages Ltd. have a requirement that
all products should generate a markup of 25% of target cost. Current expected cost per unit of new
product is Rs. 22.
Required: Calculate the target cost gap per unit for new product.
Example 4 Target cost gap

Packages Ltd. is considering whether or not to launch a new product. The sales department has
determined that a realistic selling price will be Rs. 25 per unit. Packages Ltd. have a requirement that
all products should generate return equal to 10% on investment. Production of new product will require
additional investment in plant and machinery equal to Rs. 10 million and it is expected that company
would be able to sell 200,000 units of new product during whole life cycle. Current expected cost per
unit of new product is Rs. 22.
Required: Calculate target cost gap per unit and in total for new product.
LO 3: Closing the Target cost gap
In order to remove the target cost gap, following various techniques can be employed:
1. Re-design the product and its features
2. Using standardised components.
3. Reduce number of components
4. Purchased material in bulk quantity to obtain quantity discounts.
5. Use price tendering among different suppliers to get the best price
6. Control material wastage through acquiring new and more efficient technology.
7. Eliminate and reduce excessive packing material
8. Provide Training to staff in more efficient techniques
9. Use experienced labour to avail the benefit of learning effect.
 CHAPTER 13: TARGET COSTING

PAST PAPER QUESTIONS

Question 1 ICAP COST ACCOUNTING – CAF 8 – STUDY TEXT EXAMPLE
A company has designed a new product Alpha. It currently estimates that in the current market, the
product could be sold for Rs.70 per unit. A gross profit margins of at least 30% on the selling price
would be required, to cover administration and marketing overheads and to make and to make an
acceptable level of profits. A cost estimation study has produced the following estimate of production
cost of Alpha:
Cost items
Material A cost Rs. 9 per unit of product Alpha
Material B cost Each complete unit of product Alpha will require three meters of
Material B but there will be loss in production of 10% of material
purchased. Material B costs of Rs.1.80 per meter.

Direct labour cost Each complete unit of product Alpha will require 0.5 hours of direct
labour Time. However it is expected that there will be unavoidable
idle time equal 5% of total labour time paid for. Labour is paid at
the rate of Rs.19 per hour.

Production It is expected that production overheads will be absorbed into

overheads cost products costs at the rate of Rs.60 per direct labour hour, for each
active hour worked.
Required
i. Calculate the expected cost per unit of product Alpha
ii. Calculate target cost per unit of product Alpha
iii. Calculate the size of target cost gap.
Question 2 ICAP COST ACCOUNTING – CAF 8 – QUESTION BANK – Q 11.1
Scriba Company (SC) trying to launch a new product into competitive market in North America. Test
marketing has revealed the following demand curve for the product:
P = 600 – 0.005Q
where P = Sale price per unit , Q = Sales Quantity
The estimated market for the product is 500,000 units per year. The company would like to capture
10% of this market. The company has estimated a cost card based on 50,000 units of sales each year.

Rs.
Direct material 100
Direct Labour 30
Fixed Overheads 70
The company Wishes to achieve a target profit of Rs. 10,000,000 for sale of this product per year.
Required:
(a) What price will the company have to charge to capture its required market share and what is the
target unit cost to achieve its target profit? (08)
(b) What is the size of the target cost gap and how might Scriba Company seek to close this gap?
(10)
 CHAPTER 13: TARGET COSTING
Question 3 ICAP COST ACCOUNTING – CAF 8 – QUESTION BANK – Q 11.2
Pollar company assembles and sells a range of components for motor vehicles and it is considering a
proposal to add a new component to its product range. This is a component for electric motor cars,
which has been given to code number NP 19.The company sees an opportunity to gain market share
in the market that is expected to grow considerably over time, but already competition from rival
producer is strong.
Component NP19 would be produced by assembling a number of parts bought in from external
suppliers, and would then be sold on to manufacturers of electric cars. Pollar company would use its
current workforce as assemble workers to make the component.
Production overheads are currently absorbed into production costs on an assembly hour basis. Pollar
company is considering the use of target costing for the new component. Cost information for the new
component NP19 is as follows:
1. Part 1922: Each unit of component NP19 requires one unit of part 1922.These bought-in parts
are purchased in batches of 5,000 units ,and the purchase cost is Rs. 5.30 each plus delivery
costs of 2,750 per batch.
2. Part 1940: Each unit of component NP19 requires 20 cm of part 1940, which costs of Rs. 2.40
per meter to purchase. However it is expected that there will be some waste due to cutting and
that 5% of the purchased part will be lost in the assembly process.
3. Other parts for component NP19 will also be bought in and will cost Rs. 7.20 per unit of the
component.
4. Assemble labour. It is estimated that each unit of the component NP19 will take 25 minutes
to assemble. Assembly labour, which is not in short supply, is paid Rs. 24 per hour. It is estimated
that 10% of paid labour time will be idle time.
5. Production overheads. Analysis of recent historical costs for production overheads shows the
following costs.
Total production Total assembly
overheads (Rs.) hours worked
Month 1 912,000 18,000
Month 2 948,000 22,000
Fixed production overheads are absorbed at a rate per assembly hour based on normal activity
levels. In a normal year, Pollar Company works 250,000 assembly hours.
6. Pollar company estimates that its need to sell component NP19 at a price of no more than Rs.
56 per unit to be competitive, and it is considered than an acceptable gross profit on
components sold by the company is 25%.
Required:
(a) Calculate the expected cost per unit of component NP19 and calculate any cost gap that exists.
(13)
(b) Explain briefly how target costing might be used in the development and production of a new
product. (03)
(c) Explain the benefits of adopting a target costing approach at an early stage in the development
of a new product. (04)
(d) If a target costing approach is used and a cost gap is identified for component NP19, suggest
possible measures that Pollar Co might take to reduce the gap. (05)
 CHAPTER 13: TARGET COSTING

Question 4 ICAP COST ACCOUNTING – CAF 8 – SPRING 2016 – Q 6

Hi-tech Limited (HL) assembles and sells various components of heavy construction equipment. HL is
working on a proposal of assembling a new component EXV-99. Based on study of the product and
market survey, the following information has been worked out:
Projected lifetime sale of the component EXV-99 (Units) 500,000
Selling price per unit (Rs.) 11,000
Target gross profit percentage 40%
Information about cost of production of the new component is as follows:
i. One unit of EXV-99 would require:
Parts no. Net quantity Cost (Rs.)
XX 1 unit Rs. 2,350 per unit
YY 1.5 kg Rs. 1,400 per kg
ZZ 1 unit Rs. 1,200 per unit
The above parts would be imported in a lot, for production of 1,000 units of EXV-99. Custom duty
and other import charges would be 15% of cost price. HL is negotiating with the vendor who has
agreed to offer further discount.
ii. On average, assembling of one unit of EXV-99 would require 1.8 skilled labour hours at Rs. 200
per hour. The production would be carried out in a single shift of 8 hours. At the start of each
shift, set-up of machines would require 30 minutes. 6% of the input quantity of YY and ZZ would
be lost during assembly process.
iii. HL works at a normal annual capacity of 4,000,000 skilled hours. Actual production overheads and
skilled labour hours for the last two quarters are as under:
Quarter ended Total assembly hours Production overheads (Rs.)
30-Sep-2014 950,000 65,600,000
31-Dec-2014 1,050,000 68,000,000
iv. A special machine that would be used exclusively for the production of EXV-99 would be
purchased at a cost of Rs. 1,500,000.
Required: From the above information, determine the discount that HL should obtain in order to
achieve the target gross profit. (16)
Question 5 ICAP COST ACCOUNTING – CAF 3 – SPRING 2022 – Q 3

Denmark Ice Cream (DIC) runs various ice cream parlors across the city. Below is the average
weekly information extracted from DIC's records:
Rs. in '000
Sales 500
Variable cost (350)
Fixed cost (100)
Profit 50
DIC is now planning to introduce frozen yogurt in addition to its existing ice cream range to attract
more customers. In this regard, following information has been gathered:
(i) Sale of 800 frozen yogurt cups every week is expected to be achieved at selling price of Rs. 190
per cup. It is expected that introduction of frozen yogurt would also increase the sales volume of
ice cream by 10%.
 CHAPTER 13: TARGET COSTING
(ii) Variable cost of frozen yogurt will be Rs. 150 per cup.
(iii) Fixed cost will increase by 12% due to launching of marketing campaign for frozen yogurt.
(iv) DIC's target is to achieve a profit margin of 14% after introducing frozen yogurt.
Required:
a) Compute the cost gap. (03)
b) Discuss the methods that DIC can use to close the cost gap identified in (a) above. (04)
 CHAPTER 13: TARGET COSTING

SOLUTIONS
Example 1 Target cost gap

Target cost per unit

Rs.
Estimated selling price per unit 20
Less: Required gross profit per unit (25% x Rs. 20 per unit) (5)
= Target cost per unit 15
Current expected cost per unit
Rs.
Direct material cost (2 kgs x Rs. 5 per kg) 10.00
Add: Direct labour cost (1.5 hours x Rs. 4 per hour) 6.00
Add: Factory overheads
Variable FOH cost (1.5 hours x Rs. 1 per hour) 1.50
Fixed FOH cost (1.5 hours x Rs. 0.75 per hour) 1.13
= Current expected cost per unit 18.63
Target cost gap per unit
Rs.
Current expected cost per unit 18.63
Less: Target cost per unit (15.00)
= Target cost gap per unit 3.63

Example 2 Target cost gap

Target cost per unit

Rs.
Estimated selling price per unit 50
Less: Required net profit per unit (20% x Rs. 50 per unit) (10)
= Target cost per unit 40
Current expected cost per unit
Rs.
Direct material cost (2.5 kgs x Rs. 5 per kg) 12.50
Add: Direct labour cost (3 hours x Rs. 4 per hour) 12.00
Add: Factory overheads
Variable FOH cost (3hours x Rs. 2 per hour) 6.00
Fixed FOH cost (3 hours x Rs. 1 per hour) 3.00
= Production cost per unit 33.50
Add: Administration cost (10% x Rs. 33.50 per unit) 3.35
Add: Selling costs (10 % x Rs. 50 per unit) 5.00
= Current expected cost per unit 41.85
Target cost gap per unit
Rs.
Current expected cost per unit 41.85
Less: Target cost per unit (40.00)
= Target cost gap per unit 1.85

Example 3 Target cost gap

 CHAPTER 13: TARGET COSTING
Target cost per unit
Rs.
Estimated selling price per unit 25
Less: Required net profit per unit (Rs. 25 per unit÷125%)x 25% (5)
= Target cost per unit 20
Target cost gap per unit
Rs.
Current expected cost per unit 22.00
Less: Target cost per unit (20.00)
= Target cost gap per unit 2.00
Example 4 Target cost gap

Target cost per unit

Rs.
Estimated selling price per unit 25
Less: Required profit per unit (Rs. 10 million x 10%) ÷ 200,000 units (5)
= Target cost per unit 20
Target cost gap
Rs.
Current expected cost per unit 22.00
Less: Target cost per unit (20.00)
= Target cost gap per unit 2.00
x : Sales volume in whole life (units) x 200,000
= Total Target cos gap 400,000
 CHAPTER 13: TARGET COSTING

PAST PAPER SOLUTIONS

Question 1 ICAP COST ACCOUNTING – CAF 8 – STUDY TEXT EXAMPLE

(i) Target cost per unit

Rs.
Estimated selling price per unit 70
Less: Required Gross profit (Rs. 70 per unit x 30%) (21)
= Target cost per unit 49
(ii) Current Expected cost per unit
Rs.
Material A cost 9
Add: Material B cost [Rs. 1.80 per meter x (3 meters ÷ 90% x 100%)] 6
15
Add: Direct Labour cost [Rs. 19 per hour x (0.5 ÷ 0.95)hours] 10
Add: Production overheads cost [Rs. 60 per hour x 0.5 hours worked] 30
= Current expected cost per unit 55
(iii) Target cost gap per unit
Rs.
Current expected cost per unit 55
Less: Target cost per unit (49)
= Target cost Gap per unit 6
Question 2 ICAP COST ACCOUNTING – CAF 8 – QUESTION BANK – Q 11.1

(a) – Sale price of new product

P = Sale price per unit, Q = Sales volume
P = 600 - 0.005Q
P = 600 - 0.005 (500,000 x 10%)
P = 600 - 0.005 (50,000)
P = 600 - 250
P = Rs. 350 per unit
(b) – Target cost gap
Target cost per unit
Rs.
Estimated selling price per unit 350
Less: Required Gross profit (Rs. 10 million ÷ 50,000 units) (200)
= Target cost per unit 150

Target cost gap per unit

Rs.
Current expected cost per unit (Rs. 100 + Rs. 30 + Rs. 70 per unit) 200
Less: Target cost per unit (150)
= Target cost gap per unit 50
 CHAPTER 13: TARGET COSTING

Question 3 ICAP COST ACCOUNTING – CAF 8 – QUESTION BANK – Q 11.2

(a) – Expected cost and Target cost gap per unit

Target cost per unit
Rs.
Estimated selling price per unit 56
Less: Required Gross profit (Rs. 56 per unit x 25%)) (14)
= Target cost per unit 42
Expected cost per unit
Rs.
Material cost – Part No. 1922
Purchase cost 5.30
+ Delivery cost to purchase (Rs. 2,750 ÷ 5,000 units) 0.55
Add: Material cost – Part No. 1940
[(20 cm ÷ 100 x 100%÷ 95%) x Rs. 2.40 per meter] 0.51
Add: Material cost – Other parts 7.20
Add: Assembly labour cost
[(25 mins ÷ 60 x 100% ÷ 90%) x Rs. 24 per hour ] 11.11
Add: Production overheads cost
Variable production overheads cost [(25 mins ÷ 60) x Rs. 9 per hour ] 3.75
Fixed FOH absorbed cost [(25 mins ÷ 60) x Rs. 36 per hour ] 15

= Current expected cost per unit 43.42

Target cost gap per unit
Rs.
Current expected cost per unit 43.42
Less: Target cost per unit (42.00)
= Target cost gap per unit 1.42
(b) – Process of target costing
Step 1: Product design
Target costing begins by specifying a product an organisation wishes to sell. This will involve
extensive customer analysis, considering which features customers’ value and which they
do not. Ideally only those features valued by customers will be included in the product
design.
Step 2: Identification of sale price
The price at which the product can be sold at is then considered. This will take in to account
the competitor products and the market conditions expected at the time that the product
will be launched. Hence a heavy emphasis is placed on external analysis before any
consideration is made of the internal cost of the product.
Step 3: Determination of target cost
From the above price a desired margin is deducted. This can be a gross or a net margin.
This leaves the cost target. An organisation will need to meet this target if their desired
margin is to be met.
 CHAPTER 13: TARGET COSTING

Step 4: Determination of current expected cost and target cost gap

Costs for the product are then calculated and compared to the cost target mentioned above.
Step 5: Closing the target cost gap
If it appears that this cost cannot be achieved then the difference (shortfall) is called a cost
gap. This gap would have to be closed, by some form of cost reduction, if the desired margin
is to be achieved.
(c) – Benefits of target costing
i. External focus towards product development
The organisation will have an early external focus to its product development. Businesses
have to compete with others (competitors) and an early consideration of this will tend to
make them more successful. Traditional approaches (by calculating the cost and then adding
a margin to get a selling price) are often far too internally driven.
ii. Inclusion of valuable features in product design
Only those features that are of value to customers will be included in the product design.
Target costing at an early stage considers carefully the product that is intended. Features
that are unlikely to be valued by the customer will be excluded. This is often insufficiently
considered in cost plus methodologies.
iii. Cost control
Cost control will begin much earlier in the process. If it is clear at the design stage that a
cost gap exists then more can be done to close it by the design team. Traditionally, cost
control takes place at the ‘cost incurring’ stage, which is often far too late to make a
significant impact on a product that is too expensive to make.
iv. Enhanced profitability of product
Costs per unit are often lower under a target costing environment. This enhances
profitability. Target costing has been shown to reduce product cost by between 20% and
40% depending on product and market conditions. In traditional cost plus systems an
organisation may not be fully aware of the constraints in the external environment until after
the production has started. Cost reduction at this point is much more difficult as many of
the costs are ‘designed in’ to the product.
v. Reduced time to market the product
It is often argued that target costing reduces the time taken to get a product to market.
Under traditional methodologies there are often lengthy delays whilst a team goes ‘back to
the drawing board’. Target costing, because it has an early
external focus, tends to help get things right first time and this reduces the time to market.
 CHAPTER 13: TARGET COSTING

(d) – Steps to reduce a cost gap

i. Review the features of product
Remove features from the component NP 19 that add to cost but do not significantly add
value to the product when viewed by the customer. This should reduce cost but not the
achievable selling price. This can be referred to as value engineering or value analysis.
ii. Team approach
Cost reduction works best when a team approach is adopted. Pollar Limited should bring
together members of the marketing, design, assembly and distribution teams to allow
discussion of methods to reduce costs. Open discussion and brainstorming are useful
approaches here.
iii. Review the whole supplier chain
Each step in the supply chain should be reviewed, possibly with the aid of staff
questionnaires, to identify areas of likely cost savings. Areas which are identified by staff as
being likely cost saving areas can then be focused on by the team. For example, the
questionnaire might ask ‘are there more than five potential suppliers for this component?’
Clearly a ‘yes’ response to this question will mean that there is the potential for tendering or
price competition.
iv. Components
Pollar company should look at the significant costs involved in components. New suppliers
could be sought or different materials could be used. Care would be needed not to damage
the perceived value of the product. Efficiency improvements should also be possible by
reducing waste or idle time that might exist. Avoid, where possible, non-standard parts in
the design.
v. Assembly workers
Productivity gains may be possible by changing working practices or by de-skilling the
process. Automation is increasingly common in assembly and manufacturing and Pollar
Company should investigate what is possible here to reduce the costs.
The learning curve may ultimately help to close the cost gap by reducing labour costs per
unit.

Question 4 ICAP COST ACCOUNTING – CAF 8 – SPRING 2016 – Q 6

Target cost per unit and total

Rs.
Estimated selling price per unit 11,000
Less: Required Gross profit (Rs. 11,000 per unit x 40%)) (4,400)
= Target cost per unit 6,600
Total target cost
= Target cost per unit x projected life time sale units
= Rs. 6,600 per unit x 500,000 units = Rs. 3,300 million
 CHAPTER 13: TARGET COSTING

Total Current Expected cost of new component EXV – 99

Rs.
(million)
Material cost – Part No. XX
(Rs. 2,350 per unit x 1 unit of part XX ) x 1.15 x 0.5 million units 1351.25
Add: Material cost – Part No. YY
[Rs. 1,400 per Kg x (1.5 Kg x 100% ÷ 94% ) x 1.15 x 0.5 million units] 1284.57
Add: Material cost – Part No. ZZ
[Rs. 1,200 per unit x (1 unit of part ZZ x 100% ÷ 94% ) x 1.15 x 0.5 million units] 734.04
= Material costs (including custom duty and import charges) 3369.86
Add: Assembly labour cost
[(1.8 hours per unit x 100% ÷ 93.25%) x Rs. 200 per hour x 0.5 million units] 192.00
Add: Production overheads cost
Variable production overheads (1.8 hours x Rs. 24 per hour x 0.5 million units) 21.60
Fixed FOH absorbed cost (1.8 hours x Rs. 42.8 per hour x 0.5 million units) 38.52
Depreciation of special machine 1.50
= Current total expected cost 3623.48
Target cost gap
Rs. (million)
Current total expected cost 3623.48
Less: Total target cost (33,00.00)
= Total target cost gap 323.48
Discount that HL should obtain in order to achieve the target gross profit
If HL Company wants to achieve target gross profit then its current total cost and total target cost
should be same by removing target cost gap of Rs. 323.48 million. In order to reduce current expected
cost company will have to avail discount of Rs. 323.48 million from supplier.
Current expected cost of materials = Rs. 3,369.86 million
Reduction in material cost (discount) = Rs. 323.48 million
Discount rate (%) = (Rs. 323.48 million ÷ Rs. 3,369.86 million) x 100 = 9.60%
Question 5 ICAP COST ACCOUNTING – CAF 3 – SPRING 2022 – Q 3

(a) Denmark Ice Cream

Cost gap
Step 1 – Target cost Rs.
Sales revenue of ice cream and yogurt
(Rs. 190 x 800 cups of yogurt) + (Rs. 500,000 x 1.10) 702,000
Less: Required net profit @ 14% (98,280)
= Total Target cost after launch of yogurt 603,720
Step 2 – Current expected cost Rs.
Variable cost of ice cream (Rs. 350,000 x 1.10) 385,000
Add: Variable cost of yogurt (Rs. 150 per cup x 800 cups) 120,000
Fixed cost (Rs. 100,000 x 1.12) 112,000
= Total current expected cost after launch of yogurt 617,000
Step 3 – Target cost gap
Target cost gap = Current cost – Target cost
Target cost gap = Rs. 617,000 – Rs. 603,720 = Rs. 13,280
 CHAPTER 13: TARGET COSTING
(b) Closing the target cost gap
(i) Re-design products to make use of common processes and components that are already used in
the manufacture of other products by the company
(ii) Discuss with key supplier’s methods of reducing materials costs. Target costing involves the
entire ‘value chain’ from original suppliers of raw materials to the customer for the end-product, and
negotiations and collaborations with suppliers might be an appropriate method of finding important
reductions in cost.
(iii) Achieve cost efficiency by reducing the wastages.
(iv) Eliminate non value-added activities or non-value-added features of the product design.
Something is ‘non-value added’ if it fails to add anything in value for the customer. The cost of non-
value-added product features or activities can therefore be saved without any loss of value for the
customer. Value analysis may be used to systematically examine all aspects of a product cost to
provide the product at the required quality at the lowest possible cost.
(v) Use standardized components that will reduce the cost. However, it might impact the innovation
element for the product.
(vi) Cost efficiency may also be achieved by reducing idle time.
(vii) Train staff in more efficient techniques and working methods. Improvements in
efficiency will reduce costs.