CalculationBackward Target Price: Allowed Machining Time
Backward Target Price: Allowed Machining Time
Works back from a target price to determine how many machining minutes per part are available.
How to use the result
Reverse costing answers “How fast would we have to be?” instead of “What does it cost us?”. If the allowable time is below the realistic time, the options are a different process, a larger quantity, deliberately lower profit, or declining the order.
The target price always applies to a quantity because one-time costs are distributed across the number of units. The table shows how much time each batch size permits.
Reducing the time on paper merely shifts the problem into production. Instead, verify whether the planned cycle time is achievable with the program.
Formulas
revenue = target price · (1 − discounts)allowable total cost = revenue / (1 + profit) or revenue · (1 − margin)allowable manufacturing cost = total cost / (1 + administration and sales)time budget = (manufacturing cost − one-time cost / quantity) · (1 − scrap) − material − tool − subcontractingallowable cycle time = Budget / manufacturing hourly rate · 60 Sources: Target costing according to standard managerial accounting practice (reverse costing); Overhead costing (industrial costing)