Target costing is a pricing strategy used by companies to manage costs and ensure profitability while meeting customer expectations. The process begins by determining the desired selling price of a product based on market research and competitive analysis. From this price, the company subtracts its desired profit margin to establish a target cost. The goal of target costing is to align product design and manufacturing processes with the target cost, encouraging cross-functional collaboration among teams. This approach helps identify cost-saving opportunities early in the product development cycle, ensuring that products are both cost-effective and competitive in the market. By focusing on cost management from the outset, companies can enhance their financial performance, improve product quality, and increase customer satisfaction. Target costing is particularly useful in industries with tight margins, where efficiency and innovation are crucial for success.
