Traditional manufacturing methods often use “Cost-Plus” pricing, where design costs are calculated first and a profit margin is added to determine the selling price. This lesson introduces Target Costing and Life-Cycle Costing, which reverse this model to optimize profitability from design to disposal. 

Target costing is driven by market realities. It begins with an analysis of competitive market conditions to determine a sustainable selling price, then subtracts the company’s required profit margin to establish the maximum cost allowed for production:

    Target Market Selling Price
   ─ Required Corporate Profit Margin
   ───────────────────────────────────────────────────────────────────────────
   = TARGET COST LIMIT (Designers must engineer the product to fit this limit)

If the initial product blueprint exceeds this calculated target cost, the design team must use value engineering to adjust materials, components, or manufacturing processes until the projected cost matches the target.

Traditional costing focuses heavily on upstream manufacturing costs. Life-Cycle Costing tracks all expenditures associated with a product across its entire lifespan, from cradle to grave:

Total Life-Cycle Cost = Research & Development (R&D) + Product Design + Raw Material Procurement + Manufacturing Conversion + Distribution & Marketing + Warranty Support + End-of-Life Disposal Costs

Up to 80% of a product’s lifelong costs are locked in during the initial R&D and design phases. Applying life-cycle costing helps prevent companies from cutting design budgets in ways that lead to higher warranty claims or disposal costs down the line.