Target Costing

Target Costing is most applicable to companies that compete by continually issuing a stream of new or upgraded products into the marketplace. It is a system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve for a new product. It decomposes the target cost from product level to component level. It consists of cost planning in the design phase of production as well as cost control throughout the resulting product life cycle. Target Costing concept has limited application in a services business where labor comprises the primary cost. It is an excellent tool for planning a suite of products that have high levels of profitability.