What is the Disadvantages of Target Costing?

There are three mothods of costing. FIFO, Average Cost and LIFO:

On the tax side:

If you use average cost for tax purposes, when an item is sold, the income for tax purposes will be the (selling price) - (the average cost). This margin is usually higher than in the LIFO method because the cost of acquiring goods usually goes up over time. Under the LIFO method you get to report the (selling price)-(cost of most newet uint). Clearly the income reported for this amount will be less than the income reported using the average costing method thus decreasing your income tax burden for the current year.

On the financial reporting side (net-income):

If you use average cost, the income that you make will be as above, the selling price minus average cost. This margin is lower than in the FIFO method. Again, because the cost of goods usually goes up over time. Under the FIFO method, you will use (selling price) - (cost of the oldest unit). This amount will be higher than the amount reported under average cost thus increasing your reported net income for the current year.

The advantage to average cost is that your reported income may fluctuate less year over year.

It is also worth mentioning that:

• Under IRS rules for income reporting, if the LIFO method is used for tax purposes it MUST also be used for income reporting purposes.

• Under GAAP you have to pick a method and stick with it unless there is a legitimate reason to need to modify it and you can convince the independent auditor that your reasoning makes sense.