Target costing is an approach to profit planning in which a manufacturing company identifies a target profit margin and, based on the prevailing market price, calculates the maximum cost of manufacturing which will yield the target profit level. As an example, if widgets sell for a market price of $100 and the company wants to make a profit of $10 on each unit sold, then the target cost is $90. This target cost will then affect the product design, materials, specifications and manufacturing choices, which will be focused on ensuring that the profit target is realised. Target costing is an alternative to cost plus pricing in which a company would bring a product to market, for example at a cost of $95, and then have to accept a margin of $5 in order to remain competitive. As product life cycles have become shorter, the ability to value engineer the design during the life cycle of the product has reduced and so target costing seeks to engineer profitability from the time of the product launch.

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