Target costing

In this lesson

1. 0:00 Target Costing: Strategic profit management introduction
2. 1:50 Target Costing step-by-step exam approach
3. 3:06 Why Target Costing matters in competitive markets
4. 4:17 Worked example: calculating target cost and cost gap
5. 6:00 Closing the cost gap: practical strategies
6. 8:26 Value engineering and functional analysis techniques
7. 9:05 Reverse engineering considerations and ethics
8. 9:52 Complex case study: Fault Manufacturing scenario
9. 12:44 Interpreting results and negotiation strategy

About this lesson

This is essential for PM, APM, and SBL papers, where you may be asked to calculate target costs, identify cost gaps, and suggest practical ways to close them. Target costing reverses traditional cost-plus pricing. Instead of building a product and marking it up, you start with the market price (determined by competition and customer demand), subtract your target profit margin, and work backwards to find the maximum cost you can afford. If your current estimated cost exceeds this target, you face a cost gap that must be closed through value engineering, functional analysis, or process redesign. The lesson walks you through a step-by-step methodology: establish the selling price, determine target profit, calculate target cost, identify the gap, and propose solutions—all with worked examples showing how to handle lifecycle costs, failure rates, and other real-world adjustments. You'll see why target costing matters now more than ever: intense competition and price transparency online mean you can't simply charge what you want. The technique is particularly valuable in exam questions where you're asked to explain the cost gap to stakeholders or negotiate with suppliers. The lesson emphasises a crucial rule: never suggest raising the selling price to close the gap, as this ignores market constraints and changes your sales volume assumptions. Instead, focus on practical cost reductions that maintain quality and support your strategic objectives.

Duration: 15m