Target Costing derives economic target costs from market and profit requirements.
A development team then faces the question:
How can this overall budget be sensibly transferred to the product?
A purely component-based distribution can be problematic if the existing technical structure has not yet been defined or is to be changed fundamentally.
A function-oriented approach offers an additional perspective.
Linking Customer Value and Function
Once customer requirements have been captured in a structured way, it is possible to examine:
- which functions are particularly important
- which functions create differentiation
- which functions merely represent necessary basic performance
This creates a link between customer value and technical tasks.
From Functions to Cost Budgets
On this basis, target costs can be discussed at function level.
The basic idea is:
Economically appropriate effort should be available for customer-relevant functions.
This does not mean that every function can be assigned an exact, mathematically “correct” cost value.
Function-based target costing is above all a basis for management and discussion.
Why Component Budgets Alone Can Be Limiting
If target costs are distributed early across existing assemblies, there is a risk of locking in today’s architecture.
Function-based target costs, by contrast, can open up the question:
Which technical solution performs this function within the economic framework?
This makes the approach a good fit for Value Engineering.
Link to Function Costs
Function costs describe the current or calculated effort for functions.
Function-based target costs describe a desired economic framework.
The difference can reveal opportunity areas.
But here, too, the following applies:
A large deviation alone does not prove that a function is “too expensive”. Customer relevance, technical boundary conditions and risks must be taken into account.
Practical Application
One possible approach:
- determine the product’s target costs
- structure customer requirements and functions
- consider functions according to their relevance
- discuss the economic target framework
- compare current or planned function costs
- prioritising opportunity areas
- develop alternative solutions
The specific methodology depends on the project and on the Target Costing system used.