Definition

Target

Costing is defined as a cost

management tool for reducing the
overall cost of a product over its
entire life-cycle with the help of
production, engineering, research
and design.

Target Costing Characteristics

Contradicts the traditional approach: design

product, determine cost, set price
Intense customer focus
What do they want?
How much will they pay for it?

Can we make a profit on it?

Want answers to these questions before
committing to the project

Target costing Vs Cost Plus technique

Cost Plus

Target Costing

Market considerations not part of cost

planning.

Competitive market considerations

drive cost planning.

Costs determine price.

Price determines costs.

Waste and inefficiency is focus of cost Cost reduction is achieved by

reduction efforts.
simultaneous product/process design.
Cost reduction is not customer driven.

Customer input guides cost reduction.

Suppliers involved after product

designed.

Suppliers involved in concept and

design of product.

Approach to target costing

Price-based

targeting

A target cost is the maximum amount of cost

that can be incurred on a product.
Target Cost = Market Price Expected Margin

Price-based targeting

Sets target cost for the product through

comparison with that of competitors
This means setting the price of the product by
observing what the market will bear, then
deducting the desired profit margin from the
price, and thereby obtaining the target cost.