Most companies calculate product costs the same way: a product is developed, the costs for materials, manufacturing, and assembly are determined, and the result is a price meant to secure the desired margin. Target Costing deliberately reverses this order – with sometimes considerable effects on competitiveness and profitability.

The Core Idea: Calculating Backwards from the Market

Target Costing doesn't start with the question "What will development cost?" but with "What may the product cost in the market, so that customers buy it and the company achieves the desired margin?" The desired profit margin is subtracted from the achievable market price – what remains is the so-called target cost budget, which must not be exceeded throughout the entire development process.

This target cost budget is then broken down to individual assemblies, components, or functions. From the very beginning, every development team knows its cost limit – not only at the end of development, when changes are expensive and time-consuming, but from the very first concept idea onward.

The decisive difference to classic cost calculation therefore lies in timing: Target Costing acts preventively, while classic post-calculation only reacts afterwards to costs that have already been incurred.

How Target Costing Works in Practice

A typical Target Costing process follows several steps. First, the realistically achievable sales price is determined based on market analyses and competitive comparisons. Sales, administration, and profit margins are then subtracted, establishing the target cost budget for the entire product.

In the next step, this budget is distributed across assemblies and components – often weighted according to the customer value a function provides. A function that is particularly important to the customer may claim a proportionally larger share of the budget than one that is barely noticed.

During ongoing development, a continuous comparison is then made: how do the actually calculated costs compare to the target budget? In case of deviations, development teams must find solutions together with purchasing and manufacturing – for example through alternative materials, simplified designs, or modified manufacturing processes.

Why It Often Fails in Practice Due to Spreadsheets and Silo Thinking

As convincing as the methodology sounds, practical implementation often fails. Cost data is frequently spread across different systems and departments – purchasing, development, and controlling work with their own spreadsheets that are rarely reconciled with one another in real time. As a result, development teams often notice cost overruns only late, when changes are already significantly more expensive.

In addition, BOM-based cost calculation – that is, calculation based on the actual bill of materials – requires continuous maintenance whenever the design or suppliers change. In many companies, there simply isn't time for this, causing calculations to quickly become outdated and lose their steering effect.

The Role of Cost Engineering Software

This is exactly where specialised cost engineering tools come in. Instead of maintaining cost data manually in spreadsheets, bills of materials can be linked directly to cost models, so that cost changes resulting from design adjustments become visible automatically. Target cost budgets can be stored at the assembly level and continuously reconciled with the actually calculated costs – not only at the end of the project, but throughout the entire development process.

This creates a shared, up-to-date cost basis for development, purchasing, and controlling, instead of scattered individual spreadsheets with varying degrees of currency.

Platforms such as QTRIX by Calidat map this target cost reconciliation as part of a broader cost engineering function that connects cost calculation and Target Costing with BOM-based analysis. Regardless of the tool chosen, however, one thing remains true: Target Costing only has an effect if target costs are continuously compared with actual costs, visibly to everyone involved – and not only once the product has long since entered series production.