Definition
Target costing (原価企画, genka kikaku) is a product development discipline in which the allowable cost of a new product is derived from the market — not from the factory. The logic runs in the opposite direction from conventional cost accounting: instead of designing a product and then calculating its cost, the target selling price is set first (based on competitive analysis and customer expectations), the required profit margin is subtracted, and the resulting allowable cost becomes the constraint that the entire development organization must work within.
That allowable cost is then decomposed into cost targets for every major subsystem and component. The chief engineer (shusa) manages the tradeoffs across the vehicle to ensure that the total cost target is met without compromising the product concept. The primary mechanism for closing the gap between estimated cost and target cost is value engineering — systematically redesigning to provide the required function at lower cost.
Japanese Origin
Genka kikaku (原価企画) combines 原価 (genka, “cost” or “original price”) with 企画 (kikaku, “planning” or “design”). The term translates literally as “cost planning” or “cost design” — emphasizing that cost is planned and designed into the product during development, not controlled after the fact in production. Toyota’s own English-language publications use “cost planning” as their preferred translation.
This is distinct from genka kanri (原価管理, “cost management” or “cost control”), which refers to the broader discipline of managing costs during production through kaizen, standard costing, and variance analysis. Genka kikaku operates upstream — during product development — while genka kanri operates downstream during manufacturing.
History at Toyota
Origins in Aviation Weight-Budgeting (1950s–1960s)
Target costing at Toyota traces directly to Tatsuo Hasegawa, the aeronautical engineer who codified the chief engineer (shusa) system. In aircraft design, every component has a strict weight budget — exceeding the budget in one area means reducing weight somewhere else, because total aircraft weight determines performance, fuel consumption, and range. There is no option to simply accept overweight components.
Hasegawa recognized that the same logic could be applied to cost. He adapted aviation weight-budgeting into a discipline where every vehicle subsystem received a cost target derived from the overall vehicle price target. The chief engineer managed tradeoffs across the entire vehicle to hit the cost goal — just as an aircraft designer manages weight tradeoffs to hit performance targets.
This innovation was formalized during Hasegawa’s work on the Publica (1961) and especially the first-generation Corolla (1966), where aggressive cost targets were essential to achieving the “80-Point + Alpha” product philosophy: an affordable, well-rounded car that slightly exceeded customer expectations in key areas.
Institutionalization (1960s–1970s)
By the mid-1960s, target costing became embedded in Toyota’s product planning process through the Product Planning Office that Hasegawa established in 1965. Cost targets were set during the product concept phase and cascaded through the organization as binding constraints.
Toyota’s 75-year history records that cost planning decisions are made at the product planning stage, with the chief engineer overseeing the process from planning through production and sales. The system matured through the 1970s as Toyota expanded its product lineup and refined its supplier development practices, making inter-company target costing — setting cost targets collaboratively with suppliers — a standard part of the development process.
Academic Recognition (1980s–1990s)
Target costing as practiced at Toyota became a subject of significant academic interest. Toshiro Hiromoto (1988) first brought Japanese management accounting practices to Western attention in the Harvard Business Review. Robin Cooper and Regine Slagmulder (1997) visited Toyota directly and documented it as the oldest and most technically advanced target costing system among Japanese manufacturers. Yasuhiro Monden (1993) analyzed genka kikaku as a companywide profit management activity, arguing that target costing and kaizen costing are inseparable — the former designs cost out during development, the latter continues the effort during production.
How It Works
Step 1: Set the Target Selling Price
The process begins with the market, not the factory. The chief engineer and product planning team analyze competitive vehicles, customer research, and market positioning to determine the price at which the new vehicle should sell. This is not aspirational — it reflects the realistic market price that will achieve the required volume.
Step 2: Subtract Required Profit
Toyota’s corporate profit requirements are subtracted from the target selling price, yielding the allowable cost — the maximum total cost at which the vehicle can be profitably produced.
Step 3: Estimate the Current Cost
Engineering estimates what the vehicle would cost to produce given current designs, materials, and manufacturing methods. The gap between this estimated cost and the allowable cost is the cost reduction target — the amount that must be designed out of the product.
Step 4: Decompose into Subsystem Targets
The overall cost reduction target is allocated to every major subsystem: body, chassis, powertrain, interior, electrical, and so on. Each functional group receives a cost target and is responsible for achieving it. The chief engineer coordinates the decomposition and manages cross-system tradeoffs — for example, accepting higher cost in one area if it enables greater savings elsewhere.
Step 5: Close the Gap Through Value Engineering
Value engineering (VE) is the primary mechanism for achieving target costs. Engineers systematically examine each function the component provides, then find ways to deliver that function at lower cost — through material changes, design simplification, parts consolidation, manufacturing process changes, or supplier collaboration. Toyota benchmarks suggest that approximately 95% of a product’s lifetime profit is determined during the development phase, making VE during development far more impactful than cost-cutting during production.
Step 6: Iterate Until Targets Are Met
The process is iterative. Multiple cycles of cost estimation, VE proposals, and tradeoff discussions continue until the design achieves the cost target. If targets cannot be met through engineering alone, the chief engineer may revisit the product concept — adjusting features, specifications, or scope — but always with the customer and market positioning in mind.
The Chief Engineer’s Role
Target costing is inseparable from the shusa system. The chief engineer is the single point of accountability for both the product concept and the cost target. This matters because cost tradeoffs are inherently vehicle-level decisions — saving cost in the chassis may require accepting cost in the body, and only someone with a view across the entire vehicle can make those tradeoffs intelligently.
The chief engineer does not dictate how each functional group achieves its cost target. The decomposition sets the constraint; the functional experts determine the methods. But the chief engineer manages the boundaries between functions, resolving conflicts and reallocating targets when necessary.
Common Mistakes
Starting from the factory, not the market. The most fundamental error is estimating what a product will cost to build, adding a margin, and calling that the price. Target costing reverses this logic entirely. If the market won’t support a price that covers the estimated cost plus required profit, the answer is to redesign the product — not to raise the price or accept lower margins.
Treating cost targets as negotiation. Cost targets are engineering problems, not bargaining positions. When functional groups treat their targets as opening bids to be negotiated upward, the system breaks down. The chief engineer’s job is to hold the line on total cost while allowing flexibility in how targets are allocated across subsystems.
Applying cost pressure without value engineering. Cutting cost without VE means cutting corners — removing features, downgrading materials, or pressuring suppliers to accept unprofitable pricing. Genuine target costing achieves cost reduction by redesigning to provide the same or better function at lower cost. The constraint drives creativity, not compromise.
Separating cost management from product development. If cost is managed by a separate finance or accounting function that reviews designs after the fact, the system loses its power. Target costing works because cost is an integral part of every engineering decision, managed by the same chief engineer who owns the product concept.
Ignoring supplier collaboration. At Toyota, inter-company target costing with suppliers is essential. Suppliers often control 60–70% of vehicle cost. Excluding them from the target-setting and VE process — or simply dictating cost reduction percentages — misses the collaborative engineering that makes the system effective.