How to reduce Target Cost Gap?

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The target cost gap is the Projected cost less the Target cost. When a product is first manufactured, its target cost may well be much lower than its currently-attainable cost, which is determined by current technology and processes. Management can then set benchmarks for improvement towards the target costs, by improving technologies and processes. Various techniques can be employed.

• Minimizing the number of components
• Using cheaper staff
• Using standard components elsewhere possible
• Using new, more efficient technology
• Training staff in more efficient techniques
• Reducing non-value-added activities
• Using different materials

Even if the product can be produced within the target cost the story does not end there. Target costing can be applied throughout the entire life cycle. Once the product goes into production target costs will therefore gradually be reduced. These reductions will be incorporated into the budgeting process. This means that cost savings must be actively sought and made continuously over the life of the product.

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