Target costing is a method used by a company's management to control product costs considering the market conditions. Some common factors that could impact the market price include the homogeneity of products, intensity of rivalry, and switching costs for customers.
Because companies have little to no control over the market prices, they would focus on tight cost control and effective cost planning to maximize their profits. The formula for calculating the target cost is as follows:
Targeting Costing = Selling Price - Profit Margin