ACCA PM September 2026: Target Costing — Why Raising the Price Never Closes the Cost Gap

PM passed 41% in June 2026 — the lowest pass rate of the Applied Skills papers. And in the SD25 exam's target costing case, the two most tempting ways to close a cost gap — raise the price, cut the materials — were both wrong answers.

Target costing starts with the market, not your costs

The SD25 Section B case gave candidates PU Co, launching a new printer and a compatible cartridge. Target costing works backwards: the market sets the selling price, you deduct the profit you need, and whatever is left is the maximum the product is allowed to cost. That is why the examiner classifies it as feed-forward control — you act on the cost gap before production starts, not after the variances roll in. Candidates who picked "negative feedback control" lost the mark before touching a calculator.

The first calculation trap was the target profit rule: the higher of a 25% mark-up and a 20% return on investment per unit. On a $500 printer with $300,000 invested across 500 units, the mark-up gives $100 but the investment return gives $120 — so the target cost is $380, not $400. Miss the words "higher of" and every number that follows is wrong.

The cost gap worked example

The Z1 cartridge sells at $110 with a required 25% margin, so the target cost is $82.50. The current cost build-up — casing $10, printhead $16, ink $32, machining $30 — comes to $88. Cost gap: $5.50. The exam then asked which TWO actions close it.

Wrong: raise the selling price. The price is set with reference to the market. Raise it and you no longer have a competitive product. In target costing the price is the fixed point — everything else moves around it.

Wrong: put less ink in the cartridge. PU Co's selling point is durability. Cutting the ink closes the cost gap by destroying the perceived value customers are paying $110 for. Value engineering removes cost the customer doesn't value — never the feature they buy the product for.

Right: negotiate a bulk discount with the casings supplier, and accept a lower margin. Unglamorous — but they reduce cost or profit without touching the product's position in the market.

The service twist most candidates missed

The case ended with PU Co applying target costing to a new after-sales department, asking which characteristic is NOT a reason target costing is difficult for services. The answer: services being homogeneous. They are the opposite — heterogeneous, variable every time — and that variability, together with intangibility, simultaneity and perishability, is exactly why target costing struggles outside manufacturing. Learn the four characteristics as reasons, not labels: no stable, predictable output means no reliable cost to target.

What to do before September

1. In any cost-gap requirement, strike out options that change the product's market position. Price rises and quality cuts are near-permanent distractors. Close the gap on cost — supplier terms, designing out cost, process efficiency — or accept a lower margin.

2. Read the target profit rule twice. "Higher of", per unit vs total, margin vs mark-up — the SD25 case turned $20 per unit on those words, and the target cost with it.

3. Drill the working shape: price − profit = target cost, then cost build-up, then gap. And where materials carry a normal loss — the printer's plastic had a 20% loss — gross the input up; don't net the output down.

The bottom line

PM has now run 40% (December 2025), 45% (March 2026) and 41% (June 2026) — still the hardest paper at Applied Skills level. Target costing is one of the most learnable wins on the paper: one method, one working shape, and distractors the examining team reuses.

The market sets the price. Your job is to earn a profit underneath it — not to argue with it.