Target Costing

Definition, Target Costing and Application

What is Target Costing?

Target Costing is a method of market-oriented cost management.
It is applied in the early stages of product development or project planning to design or procure products, components, or systems within defined target costs.
The objective: total costs must not exceed the price accepted by the market — while maintaining functionality and quality.

Unlike traditional costing methods, Target Costing derives the allowable costs from the target price, not the other way around.
This approach links technical requirements with commercial efficiency — forming a key element of long-term competitiveness.

Target Cost Determination and Target Costing

The determination of target costs begins with a simple question:
What is the customer willing to pay for the product?

From this target price, the target costs are derived by deducting the desired profit margin — that is, the maximum total amount that development, production, and procurement may cost.

These target costs are then allocated to assemblies, components, and functions.
The result is a structured target costing system that serves as a foundation for cost planning, product development, and procurement activities.

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Example

If the target price for a tool is €10,000, then with a 20% profit margin, the allowable total cost limit is €8,000.

These €8,000 are then allocated to design, materials, and assembly.

A Target Costing process typically follows five phases

Phases and Process of Target Costing

Analysis of Market Requirements

and Determination of the Target Price.

Determination of Target Costs

by Deducting the Profit Margin.

Allocation of Target Costs

to Components and Functions.

Comparison of Target and Actual Costs

(Variance Analysis).

Adjustment and Control

to Achieve Cost Targets.

This iterative process ensures that technical and commercial objectives remain balanced at all times.

Target Costing in Procurement and Sourcing

In procurement, Target Costing supports the decision
whether a product should be manufactured in-house or sourced externally.
It helps assess prices objectively and compare supplier quotations.
This enables cost targets to be achieved more effectively without compromising quality or delivery capability.

Supported by modern IT methods, procurement gains additional transparency:
deviations are identified early, price structures are analyzed, and target costs are reviewed systematically.
The result is sound decision-making and stable, market-aligned procurement prices.

Software Support and Digital Approaches

When dealing with large data volumes, conventional spreadsheets quickly reach their limits.
Target Costing software automates many tasks, compares historical projects, and helps determine target costs faster and more accurately.
This enables continuous cost monitoring and makes adjustments easier to track and validate.

Conclusion

Target Costing creates transparency across cost structures and promotes cost-conscious product development.
By consistently focusing on target prices and integrating modern software solutions,
the method becomes a key element of efficient cost management and long-term competitiveness.

For Transparent Price Comparisons, Target Cost Evaluation, and Confident Procurement Decisions

Optimize Your Cost Management with SIMILIA TARGET COSTING

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