ExpertMedium2 marksMultiple Choice
ACCA · Question 17 · Cost accounting techniques
Section A
A multinational tech company is developing a new budget smartphone for emerging markets. They have decided to use Target Costing.
Which of the following best describes the Target Costing process?
Section A
A multinational tech company is developing a new budget smartphone for emerging markets. They have decided to use Target Costing.
Which of the following best describes the Target Costing process?
Answer options:
A.
Costs are calculated first, and a standard markup is added to determine the selling price.
B.
The selling price is determined by the market, and the target cost is derived by deducting the desired profit margin.
C.
Target costs are set based purely on historical production inefficiencies.
D.
The product is designed without cost constraints, and marketing must sell it at whatever price covers the cost.
How to approach this question
Remember the formula: Target Cost = Expected Selling Price - Desired Profit. It starts with the market price, not the cost.
Full Answer
B.The selling price is determined by the market, and the target cost is derived by deducting the desired profit margin.✓ Correct
Target costing is a proactive cost control system. It begins by determining a competitive market price for a product. The company's required profit margin is then deducted from this selling price to arrive at the 'target cost'. The product must then be designed and engineered to be manufactured at or below this target cost.
Common mistakes
Confusing target costing with traditional cost-plus pricing.
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