What are the key performance indicators for measuring the success of target costing?

1 Target Cost Achievement

The most obvious KPI for target costing is the target cost achievement, which measures the percentage of the target cost that is actually achieved by the product. This KPI reflects how well the cross-functional teams have managed to reduce the actual cost of the product to meet or exceed the target cost. A high target cost achievement indicates that the product is competitive and profitable in the market, while a low target cost achievement suggests that there is room for improvement in the cost reduction efforts. The target cost achievement can be calculated as follows:

Target Cost Achievement = (Target Cost - Actual Cost) / Target Cost x 100%

2 Customer Satisfaction

Another important KPI for target costing is customer satisfaction, which measures how well the product meets or exceeds the customer expectations and needs. Customer satisfaction is essential for target costing, as it reflects the value proposition of the product and its alignment with the target price and market segment. A high customer satisfaction indicates that the product has a strong competitive advantage and a loyal customer base, while a low customer satisfaction suggests that the product has failed to deliver on its promises and may face rejection or complaints. Customer satisfaction can be measured by various methods, such as surveys, feedback, reviews, ratings, referrals, or repeat purchases.

3 Design Change Frequency

A third KPI for target costing is design change frequency, which measures how often the product design is changed or modified during the development process. Design change frequency is an indicator of the stability and efficiency of the target costing process, as it reflects how well the cross-functional teams have communicated and coordinated their cost reduction ideas and actions. A low design change frequency indicates that the product design is well-defined and optimized from the start, while a high design change frequency suggests that the product design is unclear, inconsistent, or prone to errors and revisions. Design change frequency can be calculated as follows:

Design Change Frequency = Number of Design Changes / Number of Design Stages

4 Cost Reduction Rate

A fourth KPI for target costing is cost reduction rate, which measures how fast and how much the product cost is reduced during the development process. Cost reduction rate is an indicator of the effectiveness and innovation of the target costing process, as it reflects how well the cross-functional teams have identified and implemented cost-saving opportunities and solutions. A high cost reduction rate indicates that the product cost is rapidly and significantly reduced to meet or exceed the target cost, while a low cost reduction rate suggests that the product cost is slowly or marginally reduced or even increased. Cost reduction rate can be calculated as follows:

Cost Reduction Rate = (Initial Cost - Final Cost) / Initial Cost x 100%

5 Profit Margin

A fifth KPI for target costing is profit margin, which measures the percentage of the product revenue that is retained as profit. Profit margin is an indicator of the financial performance and sustainability of the target costing process, as it reflects how well the product price and cost are balanced to generate a desirable profit level. A high profit margin indicates that the product is highly profitable and has a strong market position, while a low profit margin suggests that the product is barely profitable or even loss-making and has a weak market position. Profit margin can be calculated as follows:

Profit Margin = (Revenue - Cost) / Revenue x 100%

6 Learning Curve

A sixth KPI for target costing is learning curve, which measures how much the product cost decreases as the production volume increases. Learning curve is an indicator of the operational improvement and scalability of the target costing process, as it reflects how well the cross-functional teams have learned from their experience and applied their knowledge and skills to reduce the product cost over time. A steep learning curve indicates that the product cost is quickly and substantially reduced as the production volume grows, while a flat learning curve suggests that the product cost is slowly or slightly reduced or even constant as the production volume grows. Learning curve can be calculated as follows:

Learning Curve = (Cost of First Unit - Cost of Nth Unit) / Cost of First Unit x 100%

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?