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For services that have a large fixed cost base why is target costing less appropriate than activity based costing? I think this is an exam kit question but I just wrote this bit down because I wasn’t clear on it.
I will answer your question, but in future please ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other 🙂
Target costing sets a maximum cost to aim for, and in order to reduce the actual cost down to this we would normally concentrate on the direct costs (such as reducing the labour cost by possibly working faster).
If there are large fixed costs, then with or without target costing we always want to try and reduce the fixed costs. ABC is better for this because it looks at what is actually causing each of the fixed costs and then we can look for ways of operating more efficiently in order to reduce these costs.
In addition, target costing is always difficult for service businesses because of things such as the fact that each service is different (for example, there is no standard haircut for a hairdresser – some customers need more time, some less time ) unlike a manufacturing company where they produce lots of identical units which therefore all cost the same.
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