Write a note on activity based and target costing
Answers
Activity based costing – Different activities in an organization are identified and the cost of each activity with its resources is based on the actual consumption of products and services by each activity.
Target costing – This costing strategy is adopted to make sure that the business is profitable even when the market is very competitive. It involves market-driven target costing to study the market condition and ensure long-term profit for the company. It also deals with adopting cost reduction strategies.
Activity based costing
It is a costing methodology which identifies activities in an organization and assigns the cost of each according to the actual consumption by each. Compared to conventional costing it assigns more indirect costs into direct costs.
Activity based costing or ABC system recognizes the relationship between costs, activities and products. It assigns indirect costs to products through this relationship.
Target costing
Target cost is the maximum amount of cost which can be incurred on a product. Target costing is an approach to determine the life-cycle cost of a product which should be sufficient to develop specific functionality and quality and also ensure the desired profit.