What is Target Costing?
Target costing is a cost management technique that determines the maximum cost a product can incur by deducting the desired profit margin from a market-driven selling price. Engineers and designers must then deliver the product within that cost ceiling.
How It Works
- Research the market and define a competitive selling price.
- Decide the required profit margin to meet shareholder return targets.
- Compute the target cost = price − required profit.
- Compare the target cost with the current estimated cost.
- Drive cost reduction through value engineering, sourcing, and process redesign until the target is met.
Saudi Context
Saudi automotive and consumer electronics importers and assemblers facing imported competition often use target costing to set sourcing budgets and supplier negotiations. The discipline helps protect margin in a market where prices are heavily benchmarked to GCC peers.
Example
A new appliance must retail at SAR 1,200 with a 25% margin (SAR 300). Target cost = SAR 900. The current estimate is SAR 980, so the engineering team must remove SAR 80 of cost.