Costs required to perform a particular activity.
In Overhead Cost Controlling, target costs are calculated using the planned costs for the cost center and the planned costs for the activity. The target costs are then compared with the actual costs for the period.
Costs expected to be incurred when a given quantity is produced.
In Cost Object Controlling, the target costs are calculated in a cost estimate. The target cost version controls which cost estimate is used to calculate the target costs.
For example, to determine the total variance you can calculate the target costs in a standard cost estimate for the material based on the actual lot size.
Target costs are used in variance calculation. They can also be used to valuate the work in process and scrap.