ACCA PM Syllabus B. Specialist Cost And Management Accounting Techniques - Deriving a Target Cost - Past Papers ^{1 / 3}

Which of the following techniques is NOT relevant to target costing?

A    Value analysis
B    Variance analysis
C    Functional analysis
D    Activity analysis

The selling price of Product X is set at $550 for each unit and sales for the coming year are expected to be 800 units.

A return of 30% on the investment of $500,000 in Product X will be required in the coming year.

What is the target cost for each unit of Product X?

A. $385·00
B. $165·00
C. $187·50
D. $362·50

The Chemical Free Clean Co (C Co) provides a range of environmentally-friendly cleaning services to business customers, often providing a specific service to meet a client’s needs. Its customers range from large offices and factories to specialist care wards at hospitals, where specialist cleaning equipment must be used and regulations adhered to. C Co offers both regular cleaning contracts and contracts for one-off jobs. For example, its latest client was a chain of restaurants which employed them to provide an extensive clean of all their business premises after an outbreak of food poisoning.

The cleaning market is very competitive, although there are only a small number of companies providing a chemical free service. C Co has always used cost-plus pricing to determine the prices which it charges to its customers but recently, the cost of the cleaning products C Co uses has increased. This has meant that C Co has had to increase its prices, resulting in the loss of several regular customers to competing service providers.

The finance director at C Co has heard about target costing and is considering whether it could be useful at C Co.

Required:
(a) Briefly describe the main steps involved in deriving a target cost. (3 marks)

Which of the following statements describes target costing?

A. It calculates the expected cost of a product and then adds a margin to it to arrive at the target selling price
B. It allocates overhead costs to products by collecting the costs into pools and sharing them out according to each product’s usage of the cost driving activity
C. It identifies the market price of a product and then subtracts a desired profit margin to arrive at the target cost
D. It identifies different markets for a product and then sells that same product at different prices in each market

Budgeted production and sales for the year ended 30 November 2015 are:

Product P1        10,000 units
Product P2        12,500 units

The fixed overhead costs included in P1 relate to apportionment of general overhead costs only. However, P2 also includes specific fixed overheads totalling $2,500.

If only product P1 were to be made, how many units (to the nearest unit) would need to be sold in order to achieve a profit of $60,000 each year?

A. 25,625 units
B. 19,205 units
C. 18,636 units
D. 26,406 units

The following are all steps in the implementation of the target costing process for a product:

(1) Calculate the target cost
(2) Calculate the estimated current cost based on the existing product specification
(3) Set the required profit
(4) Set the selling price
(5) Calculate the target cost gap

Which of the following represents the correct sequence if target costing were to be used?

A. (1), (2), (3), (4), (5)
B. (2), (3), (4), (1), (5)
C. (4), (3), (1), (2), (5)
D. (4), (5), (3), (1), (2)

The selling price of Product X is set at $550 for each unit and sales for the coming year are expected to be 800 units.
A return of 30% on the investment of $500,000 in Product X will be required in the coming year.

What is the target cost for each unit of Product X?

A. $385
B. $165
C. $187·50
D. $362·50