Target costing is a cost management tool used to reduce the overall cost of a product over its lifecycle. It was developed by Toyota in 1965 in response to rising costs and fewer opportunities for cost reductions late in development. The target costing process involves determining a target price based on market research, then working backwards to establish a target cost per unit by determining required profit levels. The goal is to motivate cross-functional teams to innovatively design products that meet cost targets and ensure planned profit levels.

2. Definition
Target Costing is defined as a cost
management tool for reducing the overall cost
of a product over its entire life-cycle with the
help of production, engineering, research and
design.

3. History
 Target costing was invented by Toyota in 1965
Reasons:
 80-90% of the life cycle cost is determined at the design phase
of the product (Tanaka)
 continuous improvement, “cost kaizen”, inevitably lead to
fewer opportunities to cut costs (Tanaka)
SOLUTION: actual costs -> predetermined costs

4. STAGES IN TARGET COSTING
Identifying the product that satisfies the needs of the potential
customers.
Reaction of the competitors.
Determination of target price.
Determination of target operating income per unit.
Deriving target cost per unit
Application of value engineering

5. Features of Target Costing Process
 It is an integral part of the design and introduction of new products.
 A target selling price is determined using various sales forecasting techniques.
 Establishment of target production volumes.
 Determine cost reduction targets.
 A fair degree of judgement.
 A series of intense activities.
 A team-based set up to achieve its objectives.

6. OBJECTIVES
 To lower the costs of new products so that the required profit
level can be ensured.
 It emphasizes understanding the market and competition
 To motivate all company employees to achieve the target profit

7. Advantages of Target Costing
Proactive approach to cost management
Orients organization toward customer
Breaks down barriers between departments
Enhances employee awareness and empowerment
Reduces development cycle of a product.
Reduces cost of products.
It enables the organization to face & stay in the ever growing competitive
environment.
It aligns cost of features with consumers’ willingness to pay.
It reinforces the commitment for INNOVATION.
It gives the consumers “MAX. SATISFACTION”.
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8. Disadvantages of Target Costing
Requires many meetings for coordination
Development of process can be lengthened.
A large amount of cost cutting can result in finger pointing.
Sometimes difficult to reach a conclusion.

9. Companies using Target Costing
• Companies that use target costing : Although it is a relatively new concept, it is
being used heavily in most large companies especially automotive and aerospace
industry.
e.g:
General Electric
 Motorola
U.S auto companies G.M
Ford and Diamler Chrysler.
Japan’s auto companies Toyota, Honda ,Nissan , Mitsubishi
Nasa
U.S Military
Sony.

10. THANK YOU