Target Costing Allowable Cost Gap Calculator
Target costing flips the usual order: the market sets the price, the business sets the margin, and the difference is the cost you are allowed to spend. This calculator gives the allowable cost and the gap to your current estimate.
Your numbers
Price the market or customer will accept.
Margin on price, not markup on cost.
Your results
Allowable cost and gap versus required margin
Sweeps Required gross margin from 5 to 45, holding your other inputs fixed.
Track target versus standard cost in your ERP
Optional: a walkthrough of keeping a target cost version beside standard cost.
Optional. The tool and every export work without this. No spam.
How to use it
Enter the price you expect to win at, the gross margin you must earn and your current bottom-up cost. The allowable cost is price times one minus margin. If your estimate is above it, the gap is the cost to engineer out, and the annual figure multiplies that by volume so you can justify design, sourcing or process work. The chart shows how the allowable cost shrinks as the margin requirement rises, which helps in negotiation when a customer asks for a lower price.
Where the gap comes from
Break the gap into material, labor, overhead and scrap and assign each a reduction owner. Design changes such as part count, tolerance relaxation or standard stock sizes usually carry the largest savings early, before tooling is cut. Sourcing and process changes come later and are smaller. Log each idea in a tracker so the gap closes on paper before launch, not after. Be honest about overhead: a gap closed by shifting overhead rates is an allocation change, not a real saving.
- Margin is on price: 28 percent margin is not 28 percent markup
- Include warranty and freight if the customer price is delivered
- Re-run when currency or commodity prices move
Common mistakes
Teams often confuse markup with margin and understate the required price. A 30 percent markup on cost is only a 23 percent margin. Another mistake is treating a one-time gap as annual, or ignoring that target cost applies to the whole lifecycle including tooling amortization. Finally, avoid setting the target cost at the level the factory can already hit, since that defeats the purpose of the method. In your ERP, store the target cost as a separate cost version so actual standard cost can be compared with it.
Frequently Asked Questions
What is the allowable cost formula?
Allowable cost equals selling price minus required profit, or price times (1 minus margin). Everything the product consumes, including materials, labor, overhead and amortized tooling, must fit inside this number to deliver the target margin.
Is target costing the same as cost-plus pricing?
No, they are opposites. Cost-plus starts with cost and adds margin to reach a price. Target costing starts with the market price, subtracts margin, and challenges the organization to meet the resulting cost.
Should the gap use full or variable cost?
Use the same basis as the margin you are targeting. Gross margin targets use full manufacturing cost. If you target contribution margin, use variable cost only and keep fixed cost coverage as a separate check.
How often should I recalculate it?
At each design gate and whenever price, volume or key input costs change. A short monthly review during development keeps the gap visible and prevents surprise margin erosion at launch.
If you keep target and current cost versions in your ERP, we can build a private view that tracks the gap by part automatically.
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