Target costing for new product development

Abstract

Summary form only given. To ensure that new products generate acceptable financial returns, it is important that an engineering team have clear cost targets throughout the design effort. These targets should be set as an integral part of the new product development process. Setting targets and monitoring progress against them is a multidisciplinary process involving marketing, engineering, and finance. As a new product concept is developed, a selling price is projected and a target margin is identified which covers marketing, R and D, and administrative expense, and yields an acceptable profit margin. The sales prices minus the target margin becomes the cost target. This simple target, when used in the product development process, can be the basis for focusing the design effort and making tradeoffs on product features, part tolerances, and other design parameters. Included in the overall product management process, it is an important measure of the financial return on a proposed product.<>