Closing A Target Cost Gap

The target cost gap is the estimated 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.
-Reducing the number of components
-Using standard components wherever possible
-Training staff in more efficient techniques
-Using different materials
-Using cheaper staff
-Acquiring new, more efficient technology
-Cutting out non-value-added activities
(identified using activity analysis etc)
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.