target costing

The aim in target costing is to reduce costs why cutting out unnecessary costs. To see which costs are not necessary they need to decide what is absolutely needed for the product to do what it is supposed to (which is functional analysis) and to decide what costs are absolutely needed to make sure customers are prepared to pay the selling price (which is value analysis).

Think about an iPhone. Obviously certain costs have to be incurred in order for it to do what it does. In addition though people are prepared to pay more for an iPhone even though there are cheaper phones that do the same thing. Maybe this is because it looks better, in which case Apple need to have those costs to make it look better to make sure people are still prepared to pay more.