Target cost gap

Target cost gap is the shortfall between a product's currently estimated cost and its target cost (target price minus required margin), which value engineering must close before launch.

ByHoang TruongUpdated July 11, 2026

See it move

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A component priced at €80 with a required €14 margin has a target cost of €66. Engineering currently estimates its cost at €72, a €6 gap. A simplified casing saves €2.50 per unit and a lower-cost connector saves €3.50, together €6.00, bringing the estimate exactly down to the €66 target cost.

Where it fits

SubjectCost AccountingAdvancedTopicPricing & Cost ManagementAdvancedTopicStrategic & Lean Cost ManagementAdvanced

The formula

LaTeX

TC = P - M

Variables

$T C$: Target cost (€)
$P$: Target selling price (€)
$M$: Required target profit margin per unit (€)

Gives the maximum cost the product can have while still earning the required margin at the target selling price.

LaTeX

G = C - TC

Variables

$G$: Target cost gap (€)
$C$: Currently estimated cost (€)
$T C$: Target cost (€)

Measures the shortfall that value engineering must close before the product can be launched profitably.

Check yourself

PracticeCORE

A new product line has a target selling price of €120 and a required target profit margin of €20 per unit. Engineering's current cost estimate for the product is €115. What is the target cost gap?

Select an answer to check your understanding.