Chapter 1: Target costing
1. 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 (to two decimal places)?
$
2. The selling price of product Zigma is set to be $250 for each unit and sales for the coming year are expected to
be 500 units. The company requires a return of 15% in the coming year on its investment of $250,000 in product
Zigma.
What is the target cost for each unit of Zigma for the coming year? Select from the list as appropriate
$
3. In target costing, which of the following would be an appropriate strategy to reduce a cost gap for a product
that existed in a competitive industry with demanding shareholders?
A. Increase the selling price
B. Reduce the expectation gap by reducing the selling price
C. Reducing the desired margin on the product
D. Mechanizing production in order to reduce average production cost
4. Which of the following strategies would be an immediately acceptable method to reduce an identified cost gap?
A. Reduce the desired margin without discussion with business owners
B. Reduce the predicted selling price
C. Source similar quality materials from another supplier at reduced cost
D. Increase the predicted selling price
5. VC Co is a firm of opticians. It provides a range of services to the public, such as eye tests and contact lens
consultations, and has a separate dispensary selling glasses and contact lenses. Patients book appointments
with an optician in advance.
A standard appointment is 30 minutes long, during which an optician will assess the patient’s specific
requirements and provide them with the eye care services they need. After the appointment, patients are
offered the chance to buy contact lenses or glasses from the dispensary.
Which of the following describes a characteristic of the services provided by an optician at VC Co during a
standard appointment?
A. Tangible
B. Homogeneous
C. Non-perishable
D. Simultaneous
Question to be done after covering other syllabus area
Cam co
The following scenario relates to questions 6 – 10.
Cam Co manufactures webcams, devices which can provide live video and audio streams via personal computers. It
has recently been suffering from liquidity problems and hopes that these will be eased by the launch of its new
webcam, which has revolutionary audio and video quality.
The webcam is expected to have a product life cycle of two years. Market research has already been carried out to
establish a target selling price and projected lifetime sales volumes for the product. Cost estimates have also been
prepared, based on the current proposed product specification. Cam Co uses life cycle costing to work out the
target costs for its products. You are provided with the following relevant information for the webcam:
1) Direct material cost: all the parts currently proposed for the webcam are bespoke parts. However,
most of these can be replaced with standard parts costing 55% less. However, three of the bespoke
parts, which currently account for 20% of the estimated direct material cost, cannot be replaced,
although an alternative supplier charging 10% less has been sourced for these parts.
2) Direct labour cost: the webcam uses 45 minutes of direct labour, which costs $34.67 per hour. The
use of more standard parts, however, will mean that while the first unit would still be expected to
take 45 minutes, there will now be an expected rate of learning of 90% (where 'b' = – 0.152). This will
end after the first 100 units have been completed.
Required:
6. What is the target cost of the new webcam?
$
7. What is the direct material cost per unit in light of the new information in point (1)?
$
8. What is the average direct labour cost per unit in light of the new information in point (2)?
9. Are the following statements about Cam Co's target costing system true or false?
Target costing ensures that new product development costs are recovered in the target TRUE FALSE
price for the webcam.
A cost gap is the difference between the target price and the target cost of the TRUE FALSE
webcam.
CHAPTER 15 PERFORMANCE MEASUREMENT
10. Which of the following in the drop down list represents a possible method for closing the target cost gap for the
webcam?
A. Increase its selling price
B. Employ more specialist staff in its production
C. Redesign the webcam
D. Increase the number of bespoke components
Extra
11. A company has a target mark up of 25% and sells into a competitive market where the market price is $120 per
unit. The company's current costs per unit are $46 for variable costs and $60 for fixed costs, and it has a
budgeted output of 10,000 units.
What is the minimum production required to close the target cost gap?
A. 11,778 units
B. 13,636 units
C. 11,042 units
D. 12,000 units
Topic: Budgeting
