Target Costing for services

Target Costing for Services - HandbookStep 1: Design of the serviceThis first step is in regards to the description of the fundamentalproperties of the service, i.e. the definition of its function in harmonywith the client’s needs. In the case of an anonymous market, it ispossible to identify the client’s requests through market researchtools. In this step, the estimation of the potential market price is alsobased on market research.Step 2: Definition of Target Costs for the serviceFor defining the target costs, it is possible to decide betweendifferent approaches. One can focus on the firm’s costs, on thecompetitors’ costs, as well as the achievable market price. Thefollowing possibilities are available for the definition of the TargetCosts:"Market into Company" (Based on the achievablemarket price)."Out of Company" (Based on already defined costs,where the costs projection for the new product isrooted in its accountable characteristics)."Into and Out of Company" (Combination betweenMarket into Company and Out of Company)."Out of Standard Costs" (The target costs are deducedfrom reductions in the standard costs, i.e. the attainedcosts under actual procedures)."Out of Competitor" (Based on costs and prices ofcurrent competitors).The overall costs should be established in such a way, that theysustain an optimal service design, i.e. satisfying quality demands andguaranteeing a competitive cost situation at the same time. Inconsequence, this document uses the "Market into Company"method for the overall cost calculation. This method shows a higherdegree of reference to the market, which well suits the fundamentalprinciple of Target Costing.5