Write a note on activity based and target costing

Asked by admin @ 20/08/2021 in Accountancy viewed by 480 People

Q. 4. write a note on activity based and target costing

Answered by admin @ 20/08/2021

Activity based costing (ABC), is an accounting method that identifies & assigns costs to overhead activities & then assigns those costs to products. An activity based costing(ABC) system recognizes the relationship between costs,overhead activities,& manufactured products & through this relationship, it assigns indirect costs to products less arbitrary than traditional methods.

Target costing is an approach to determine a product's life cycle cost which should be sufficient to develop specified functionality & quality, while insuring it's desired profit. it involves setting a target cost by subtracting a desired profit margin from a competitive market price. A target cost is the maximum amount of cost that can be incurred on a product, however, the firm can still earn the required profit margin from that product at a particular selling price. Target costing decomposes the target cost from product level to component level. Through this decomposition, target costing spreads the competitive pressure faced by the company to product's designers & supplier's. Target costing consists of cost planning in the design phase of production as well as cost control throughout the resulting product life cycle. The cardinal rule of target costing is to never exceed the target cost. However, the focus of target costing is not to minimize costs, but to achieve a desired level of cost reduction determined by the target costing process.

Write a note on activity based and target costing

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