Definition
Methods for establishing product cost targets at the design stage: sale price - target profit = target cost.
In detail
Target Costing is a management method that sets a cost ceiling during product design, using the core formula selling price minus target profit equals target cost. It prevents cost overruns caused by the traditional design-first, calculate-later approach by moving cost management upstream into research and design. Unlike standard costing, which compares actual and standard costs afterward, or activity-based costing, which measures actual resource use, target costing drives design, procurement, and production to reduce cost before launch. Typical outputs include a target-cost breakdown, component budgets, and a cost-feasibility report for design reviews.
Example in practice
A consumer electronics company planned to launch a mid-range smartwatch. Market research set the retail price at 1500 yuan, and the company required a 15% profit margin, so the target cost was 1275 yuan. The R&D team used this as a target during the concept design phase, working with procurement and manufacturing to evaluate the cost impact of different screen, chip, and strap options, prioritizing combinations that met functional requirements without exceeding the target cost. Through this process, cost optimization was completed before mass production, avoiding the need to lower prices or sacrifice profits after launch due to high costs.