Costings

Question 1

What is target costing?

Answer 1

The target cost is calculated by deducting profit from a pre-determined selling price based on customers’ views

Driven by external market factors
Projected selling price less standard profit margin = target cost
Functional analysis and value analysis are used to reduce costs

Question 2

Calculation for target costing?

Answer 2

Projected selling price less standard profit margin = target cost

Question 3

What are the stages of target costing?

Answer 3

Target costing very important at design stage
90% of costs are built in at this stage e.g. components, packaging
Stages:
Planning
Concept design
Basic design
Detailed design
Manufacturing preparation

Question 4

Standard Costing Vs Target Costing

Answer 4

Standard costing:
A push system
An internal tool in mass production
A cost control technique
A reactive technique

Target costing:
A pull system
Driven by external market prices
A cost reduction activity
A proactive technique

Question 5

What is life cycle costing?

Answer 5

“The accumulation of costs for activities that occur over the entire life cycle of a product, from inception to abandonment”

“When seeking to make a profit on a product it is essential that the total revenue arising from the product exceeds total cost, whether those costs are incurred before, during or after the product is produced”

Question 6

What are the factors to consider with life cycle costing?

Answer 6

Management accounting systems need to be managed in order to maximise a product’s return over its life cycle
Factors to consider:
Design costs out of the product
Minimise the time to market
Maximise the length of the life cycle

Question 7

What are the cost phases of a product?

Answer 7

Cost phases of a product:
Design: research, development
Manufacture: material, labour, overheads, inventory
Operation: distribution, advertising
End of life: disposal, decommissioning