Target Cost

The development and production cost that a product cannot exceed if the customer is to be satisfied with the value of the product while the manufacturer obtains an acceptable return on its investment.

Toyota developed target costing for its small supplier group with which it has had long-term relations. Because there is no market price available from taking bids or conducting an auction, Toyota and its suppliers determine a correct/fair cost (and price) for a supplied item by estimating what the customer thinks the item is worth and then working backwards to take out cost (waste) to meet the price while preserving Toyota and supplier profit margins.