ABC vs. Target Costing

Attribute	ABC	Target Costing
Focus	Cost drivers and activities	Customer needs and market prices
Cost Allocation	Based on activities and cost drivers	Based on target selling price
Cost Control	Focuses on reducing costs of activities	Focuses on meeting target costs
Implementation	Complex and time-consuming	More straightforward and quicker

Introduction

Costing methods play a crucial role in the financial management of a company. Two popular costing methods used by businesses are Activity-Based Costing (ABC) and Target Costing. Both methods have their own set of attributes and advantages that make them suitable for different situations. In this article, we will compare the attributes of ABC and Target Costing to understand their differences and similarities.

Definition

Activity-Based Costing (ABC) is a costing method that assigns costs to products based on the activities involved in producing them. It identifies the activities that drive costs in a company and allocates those costs to products based on their consumption of those activities. On the other hand, Target Costing is a method used to determine the target cost for a product based on the price at which it can be sold in the market, while still generating a desired profit margin.

Cost Allocation

One of the key differences between ABC and Target Costing is the way costs are allocated to products. In ABC, costs are allocated based on the activities that drive those costs. This method provides a more accurate picture of the costs associated with producing a product, as it takes into account the specific activities involved. On the other hand, Target Costing focuses on setting a target cost for a product based on market conditions and desired profit margins, without necessarily considering the specific activities that drive costs.

Accuracy

ABC is often considered to be more accurate than Target Costing in terms of cost allocation. By identifying the activities that drive costs, ABC provides a more detailed and precise understanding of the costs associated with producing a product. This can help companies make more informed decisions about pricing, product mix, and resource allocation. Target Costing, on the other hand, may not provide as detailed a view of costs, as it focuses more on setting a target cost based on market conditions and profit margins.

Flexibility

Another attribute to consider when comparing ABC and Target Costing is flexibility. ABC is known for its flexibility in allocating costs to products based on the specific activities involved. This allows companies to better understand the cost drivers in their operations and make adjustments as needed. Target Costing, on the other hand, may be less flexible in terms of cost allocation, as it is more focused on setting a target cost based on market conditions and profit margins.

Implementation

Implementing ABC and Target Costing also differs in terms of complexity and resource requirements. ABC requires a detailed analysis of activities and their associated costs, which can be time-consuming and resource-intensive. Companies may need to invest in specialized software and training to implement ABC effectively. Target Costing, on the other hand, may be easier to implement as it focuses more on setting a target cost based on market conditions and profit margins, without the need for detailed activity analysis.

Decision-Making

When it comes to decision-making, ABC and Target Costing can have different impacts. ABC provides a more accurate view of costs, which can help companies make better decisions about pricing, product mix, and resource allocation. By understanding the cost drivers in their operations, companies can identify areas for cost reduction and efficiency improvement. Target Costing, on the other hand, focuses on setting a target cost based on market conditions and profit margins, which can help companies align their costs with customer expectations and market demands.

Conclusion

In conclusion, both ABC and Target Costing have their own set of attributes and advantages that make them suitable for different situations. ABC is known for its accuracy in cost allocation and flexibility in identifying cost drivers, while Target Costing focuses on setting a target cost based on market conditions and profit margins. Companies should consider their specific needs and objectives when choosing between ABC and Target Costing, as each method offers unique benefits that can impact decision-making and financial management.