What is the target cost gap?

The target cost gap is a concept used in cost management and pricing strategy. It refers to the difference between the estimated product cost and the target cost, which indicates how much the company needs to reduce its costs to meet the target.

When a company sets a target cost, it typically does so based on market conditions and desired profit margins. If the estimated product cost is higher than the target cost, this creates a gap that needs addressing to ensure profitability. This gap is crucial for effective cost control and can inform decisions about design changes, sourcing materials, or production methods to close that gap.

Target costing emphasizes understanding market demands and aligning production costs accordingly to ensure competitive pricing while maintaining profitability. Thus, recognizing the relationship between estimated costs and target costs is foundational in effective performance management.