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Differences between standard cost and target cost

A standard cost is predetermined budgeted unit cost of product or service, under specified working conditions. These conditions are normally the current actual working condition – so the standard will basically reflect what would be achieved under the existing working conditions.

A target cost, on the other hand, is the desired cost. It may not be achieved under current working condition but will require changes in production methods.

The calculation of standard cost is inwardly focused and does not consider prices or profits. Target costing starts with external selling prices for the product or services and then works backward to calculate target cost by deducting required profit.

Standard costs are usually calculated for existing products and services. Target cost may be calculated for planned products (i.e. products that are design phase). This means that the design process can be changed to help achieve the target cost.

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