This is not so much a costing technique as a management process to drive down costs to a level that will earn a satisfactory margin on the target selling price. This is the very reverse of cost-plus pricing which builds up direct and indirect costs to a total cost, then adds a profit margin to arrive at the selling price, as shown in Figure 12.1.

Target costing is attributed to the car manufacturer Toyota as far back as the 1960s and was widely copied by other Japanese manufacturers. More recently it has been adopted in other countries, not least those hosting Japanese-owned plants and their satellite suppliers. Whereas cost-plus pricing, if rigidly adhered to, ignores the customer and the state of the market, target costing is market driven and starts at the customer end. It addresses what the customer will be prepared to pay and what competition will allow to be charged.

The main thrust of target costing is in the design stage. Multi-discipline teams are formed to look at all aspects of product design, customer usage, value engineering and production processes. It is said that cost reduction is much more easily achieved at the pre-manufacturing stage than once the product is designed and into regular production.

Taken From : Accounting for Non-Accountants