Which of the following is the best definition of target costing?

Target costing is a proactive cost management approach that is market-driven. It begins by establishing a competitive market price for a product based on customer perceived value and competitor pricing. The company then subtracts its required profit margin from this market price to arrive at a 'target cost'. This target cost represents the maximum allowable cost for the product. The entire process of design, engineering, and production is then geared towards meeting this cost target without compromising quality or functionality, often employing techniques like value engineering.

A. This describes Net Present Value (NPV) or life-cycle costing, which are investment appraisal techniques involving discounted cash flows, not target costing.
B. This defines the total cost of acquisition, which focuses on the costs incurred to purchase and receive goods, a component of Total Cost of Ownership (TCO).
C. This describes cost breakdown analysis or value analysis, which are methods used within the target costing process to achieve the target, but it is not the definition itself.

1. Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning. In Chapter 21, "Pricing decisions and profitability analysis," it is stated, "Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price" (p. 688).

2. Chartered Institute of Management Accountants (CIMA). (2005). CIMA Official Terminology. "Target costing is a system of profit planning and cost management that is price-led... It begins by specifying a target selling price... from which a target profit margin is deducted to yield a target cost." (p. 34).

3. Cooper, R., & Slagmulder, R. (1997). Target Costing and Value Engineering. Productivity Press. Chapter 1, "What is Target Costing?", explains that the process starts with determining a target price that the market will accept, then a target profit is subtracted to calculate the allowable cost. (pp. 3-5).