Target Costing: The Effective Pricing Method

By definition target costing is a method of cost planning that focuses on reducing costs for products that require discrete manufacturing processes and reasonably short product life cycles. (Atkinson, Solution Manual t/a Management Accounting, 3E pg 288)

Other defined target costing as a method used in the analysis of product design that involves estimating a target cost, via a desired profit and sales price, and then designing the product/service to meet that cost. (Answers.Com)

To be more specific, target costing is a pricing method used by firms. It 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". A target cost is the maximum amount of cost that can be incurred on a product and with it the firm can still earn the required profit margin from that product at a particular selling price. (Cooper & Slagmulder, 1997)

In particular, it is determined by the maximum allowable cost for a new product and then developing a prototype that can be profitably manufactured and distributed for the maximum target cost figure. Target costing involves with the setting of a target cost by subtracting a desired margin from a competitive market price.