ABSTRACT
Target costing is primarily a technique for profit management. Its objective is to ensure that future products generate the profits identified in the firm's long-term profit plan. This objective can be achieved only if products satisfy the demands of the firm's customers and can be manufactured at their target costs. The target costing process is considerably more complex than simply taking a target selling price and subtracting a target profit margin. Instead, it consists of three major sections: market-driven costing, product-level target costing, and component-level target costing. In the market-driven costing section, customer requirements and competitive offerings are incorporated into the target costing process. In the product-level target costing section, the cost-reduction capabilities of the firm's product design and production engineers are incorporated into the target costing process. The output of the last section of the target costing process, component-level target costing, is the target cost of every component that the product contains.
