Target costing

Target costing is a costing method used to calculate product costs by deducting desired profit margin from market price of the product / service. 

The procedure of setting the costs is thus reversed to cost-plus pricing. 

Target costing is used as a means of cost reduction/optimization method.

Basic steps in Target costing:

• Estimate competitive sales price
• Setting of the desired and reasonable profit margin
• Calculate target costs = estimated selling price less desired profit margin
• Ascertain the actual costs of the product
• Calculate cost gap = difference between actual and target costs
• Try to eliminate (or reduce) the cost gap