Target Costing

Target costing is a cost management method in which a business sets the maximum allowable cost for a product before production begins.

Unlike traditional costing, the process starts with the expected selling price and subtracts the desired profit to find the maximum production cost, which is called the target cost.

For example, Pixel Corporation plans to launch a new hand mixer.

The company’s product management team conducts market research to understand the pricing and features of similar products.

For this example, assume that the company sets a selling price of thirty dollars based on this analysis and aims for a three-dollar profit per unit, setting a target cost of twenty-seven dollars.

The calculation gives the team a clear cost target to guide design and production decisions.

The product development team then designs the hand mixer to make sure the total cost stays within the target cost.

This approach helps Pixel Corporation maintain profitability while selling its product at a competitive price.

Overall, target costing helps businesses balance market demand with profit needs, but market pressures can make it difficult to keep costs within the target cost.