Target costing starts with an acceptable market or customer price and works backward to the cost the product must achieve while meeting required margin and performance.
How the control works
Set the target early enough to influence design, specification and sourcing. Allocate targets to major systems, materials or processes and manage gaps openly.
| Area | What the record should show |
|---|---|
| Control | Set the target early enough to influence design, specification and sourcing. Allocate targets to major systems, materials or processes and manage gaps openly. |
| Evidence | Retain the price and margin basis, target calculation, design assumptions, supplier proposals, tradeoffs and approvals. |
| Tradeoff | Cutting supplier price without changing design or process is not target costing. Sustainable gaps usually require engineering or scope decisions. |
Evidence buyers should retain
Retain the price and margin basis, target calculation, design assumptions, supplier proposals, tradeoffs and approvals.
Where the term is misused
Cutting supplier price without changing design or process is not target costing. Sustainable gaps usually require engineering or scope decisions.
Related definitions: supplier qualification, strategic sourcing, landed cost.
