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Target costing

Target costing starts with a market-informed selling price and subtracts the required profit to establish allowable cost. Compare that target with estimated cost to identify a cost gap, then seek feasible design, process or supply changes while protecting customer value and quality. It is especially useful before costs become committed in design. The profit allowance must use the stated margin or mark-up basis; a target is not proof that the cost is achievable.

Worked example

Expected price is $100 and required profit margin 20% of sales. Target cost is $80. Estimated cost $86 gives a $6 gap.

Common mistake

Do not deduct a mark-up percentage from selling price as though it were a sales margin, or close the gap by removing features customers require.

Where it appears in your exams

QualificationExamRelationshipPeriod
ACCA APM Direct September 2026–June 2027
ACCA MA Direct September 2026–June 2027
ACCA PM Direct September 2026–June 2027
FIA FMA Direct September 2026–June 2027