Target Costing
A strategic approach determining maximum allowable product costs by starting with market price and desired profit margin, then engineering to meet cost targets.
Target Costing
A strategic cost management approach that determines the maximum allowable cost for a new product by starting with the market price and required profit margin, then working backward to establish cost targets that product designers must achieve.
For instance, if market research indicates customers will pay $300 for a new electronic device, and the company requires a 30% profit margin, the target cost would be $210 ($300 - ($300 × 30%)), challenging product development teams to design within this constraint.
Unlike traditional cost-plus pricing, target costing starts with price and profit expectations, making cost the dependent variable. This market-driven approach ensures products meet both customer price expectations and company profitability requirements. Implementation involves cross-functional collaboration among marketing, engineering, production, and accounting to find creative cost reduction opportunities while maintaining quality and functionality, often using value engineering techniques to eliminate non-value-adding features.