Module 16 Techniques under Development in Managerial Accounting Target Costing Target costing has been developed to help companies manage their costs in circumstances when the selling price is known. Target costing may set a cost before the product is created or even designed. Once the target price is known, the desired profit margin can be deducted in order to determine the target cost beyond which the company would consider it uneconomic to produce and sell the product. Target Costing = Target Selling Price - Target profit Margin Target Costing Example P.16/5 Life Cycle Costing Life cycle costing has a similar future time focus, from the moment a product or service is conceived in the R&D laboratory or in the mind of a service deliverer until the product or service is withdrawn and all associated customer services associated with the product or service are also withdrawn. Life cycle costing gathers all revenues and costs associated with a product or service over its whole lifespan so that its ultimate profitability can be measured and management decisions taken thereon. Example of life cycle costing Take the computer industry as an example of the problems associated with the cycles: rapid advances in technology lead computer companies to withdraw models perhaps as often as every 12 months. But because customers keep the models they purchase for perhaps five (or even more) years the supplier is obliged to keep a supply of spare parts and engineering know-how to service the machine until it goes out of service. Throughput Accounting A business can only earn profits if the rate at which it earns money from sales is greater than the rate at which it spends money on production. The throughput ratio allows management to direct its business by helping managers to concentrate on current production constraints. Throughput accounting stresses that products do not earn profit, Profit earning is realized by selling products. Throughput Acco