Advanced Performance Management · Performance improvement models and techniques

Target Costing, Kaizen Costing and Life Cycle Costing for ACCA APM

Updated 11 October 2026 · Fact-checked

Target costing starts with the market price, deducts the required profit, and sets a target cost; the gap to the current cost is the cost gap. Kaizen costing cuts cost steadily after launch. Life cycle costing tracks all costs from design to disposal, so early decisions are judged on whole-life cost.

Understand Target Costing, Kaizen Costing and Life Cycle Costing

Most cost control starts after a product exists. These three techniques move the focus. They ask where costs are really decided and how to manage them over time.

Target costing works backwards. The market sets the price. The firm decides the profit margin it needs. The difference is the target cost. If the current estimated cost is higher, the difference is the cost gap. The team then closes the gap by redesign, cheaper materials, fewer components, process change or supplier negotiation. A large share of a product's cost is fixed at design stage, so this is where savings are cheapest. Value engineering and value analysis are used to remove cost that does not add value for the customer.

Kaizen costing is about continuous, small improvements during the production phase. Target costing is used before launch, when design is still flexible. Once production begins, there is less room for big change, so kaizen sets regular cost reduction targets, often per period, and expects staff to find small savings. It relies on employee involvement and a culture of improvement. The risk is that the easy savings run out, and that pressure for cuts harms quality or morale.

Life cycle costing looks at all costs of a product over its whole life: planning, design, development, production, marketing, distribution, customer service and disposal. Traditional reports often treat the pre-production costs as period expenses and lose sight of them. Life cycle costing collects them against the product. It shows that high up-front spend on design may cut later costs, and it helps judge whether a product will recover its total costs and make a return over its life. For the customer, it can include running and disposal costs, called whole-life costing.

In the exam, link the three. Target costing and life cycle costing both stress early cost commitment. Kaizen takes over after launch. Always apply the technique to the scenario given, and comment on how workable it is.

Key rules to remember

Target cost: Target cost = Target selling price − Target profit; If profit is a margin on price, profit = price × margin %. If it is a mark-up on cost, divide the price by (1 + mark-up) to get cost.
Cost gap: Cost gap = Current estimated cost − Target cost; A positive figure means cost must fall. It is the amount the team must find through redesign or process change.
Kaizen reduction target: Target cost in period = Previous cost × (1 − reduction %); Applied period by period, so the reduction compounds on the new, lower base.
Life cycle cost per unit: Total life cycle cost ÷ Total units over the life; Total life cycle cost includes pre-production, production, marketing, service and end-of-life costs. Use the same units for the whole life.
Discounted life cycle cost: Σ cash cost in year t ÷ (1 + r)^t; Use if the question gives a cost of capital and asks for present value of life cycle costs.

How to solve Target Costing, Kaizen Costing and Life Cycle Costing questions

Use this method for numerical and discussion questions on these techniques.

1Identify which technique the requirement asks for: target, kaizen, life cycle, or a comparison.
2For target costing, find the market price and required profit. Be careful whether profit is a margin on sales or a mark-up on cost.
3Compute the target cost and then the cost gap against the current cost.
4For life cycle costing, list every cost by stage and include pre-production and end-of-life costs. Spread or total them over the product's life and divide by total units if asked.
5For kaizen, apply the reduction rate to the right base each period, compounding if stated.
6Suggest practical ways to close the gap or reduce cost, tied to the scenario: design, materials, suppliers, process, staff ideas.
7Comment on limits and behaviour: quality risk, staff pressure, uncertain forecasts, long timescales.
8Finish with a clear conclusion or recommendation that answers the requirement.

Quickest way: Price, profit, gap

When to use it: Use for short calculation parts when the price and profit are given and you need the gap fast.

Write price and subtract profit to get target cost.
Subtract target cost from current cost for the gap.
Convert the gap to a percentage of current cost if the question asks for a required saving.
Add two scenario-specific ways to close it and one risk.

Common mistakes in Target Costing, Kaizen Costing and Life Cycle Costing

Treating profit as a mark-up on cost when it is a margin on price, or the reverse.
Both are percentages and the wording looks alike.
Fix: Read whether the percentage is of selling price or of cost. Margin: price × (1 − margin). Mark-up: price ÷ (1 + mark-up).
Calculating the cost gap the wrong way round or ignoring its sign.
Students rush and subtract in the wrong order.
Fix: Always do current cost minus target cost. Positive means savings are needed.
Leaving out pre-production and end-of-life costs in life cycle costing.
Students use the usual production cost lists.
Fix: Go through each stage: design, development, production, marketing, service, disposal. Tick them off against the data.
Saying kaizen and target costing are the same.
Both aim to reduce cost.
Fix: State the difference: target costing is before launch and works from price; kaizen is after launch and works from small, repeated reductions.
Giving only a definition with no application.
Students memorise theory from the text.
Fix: Use the scenario facts: the industry, product, competitors and staff. Advise what this business should do and what could go wrong.
Applying a kaizen percentage to the original cost each period.
Students forget it compounds.
Fix: Use the new lower cost as the base each period unless the question says otherwise.

Worked examples

Example 1

A firm expects to sell a new product at a market price of $80. It requires a 25% margin on selling price. Its current estimated cost is $68. Calculate the target cost and cost gap, and state the percentage reduction in cost required.

Show the solution

Target profit = 25% × $80 = $20.
Target cost = $80 − $20 = $60.
Cost gap = $68 − $60 = $8.
Percentage reduction = $8 ÷ $68 = 11.76%, about 11.8%.

Answer: Target cost is $60, the cost gap is $8 per unit, and cost must fall by about 11.8%. The team should look at redesign, fewer components, cheaper materials and supplier terms to close the gap.

Example 2

A product has a life of 4 years. Design and development cost $200,000. Production is 10,000 units a year at a variable cost of $15 per unit. Marketing costs $50,000 a year. Disposal at the end costs $30,000. Ignore discounting. Calculate the life cycle cost per unit. If the selling price is $30 per unit, state whether the product makes a profit over its life.

Show the solution

Total units = 10,000 × 4 = 40,000.
Production cost = 40,000 × $15 = $600,000.
Marketing = 4 × $50,000 = $200,000.
Total life cycle cost = $200,000 + $600,000 + $200,000 + $30,000 = $1,030,000.
Cost per unit = $1,030,000 ÷ 40,000 = $25.75.
Revenue = 40,000 × $30 = $1,200,000.
Profit = $1,200,000 − $1,030,000 = $170,000.

Answer: The life cycle cost is $25.75 per unit. At $30 the product makes a profit of $170,000 over its life, or $4.25 per unit. A report that looked only at production cost of $15 per unit would hide the heavy pre-production and marketing spend.

Exam tips

Show the target cost and cost gap on separate lines so markers can award method marks even if the price or profit is misread.
Always state whether you treated profit as a margin or a mark-up, in one short line.
In discussion parts, use the scenario: name the product, staff, supplier or market from the case and link each point to it.
When asked to compare techniques, give a clear point of difference for timing, focus and who is involved, then say when each suits the business.
Add a professional skills point: challenge the forecasts, note the risk to quality, and give a clear recommendation.

Practice questions from Performance improvement models and techniques

Target Costing, Kaizen Costing and Life Cycle Costing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Target Costing, Kaizen Costing and Life Cycle Costing: frequently asked questions

What is the difference between target costing and kaizen costing?

Target costing is used at design stage and works backwards from the market price to a target cost. Kaizen costing is used during production and seeks small, continuous cost reductions. One sets the cost the product must meet. The other keeps it falling after launch.

How do you calculate the cost gap in APM?

Find the target cost by subtracting the required profit from the target selling price. Then subtract the target cost from the current estimated cost. A positive answer is the saving the business must find.

Why is life cycle costing useful?

It collects all costs of a product from design to disposal, including those before production starts. This shows the true cost and return over the whole life. It also shows how design choices affect later costs.

Should I discount in life cycle costing questions?

Only if the question gives a cost of capital or tells you to. If it does, discount each year's costs to present value. If not, use simple totals, and you may mention that discounting would improve the analysis.