ExpertMinds LogoExpertMinds
Medium2 marksMultiple Choice
Specialist cost and management accounting techniquesTarget CostingValue Analysis

ACCA · Question 18 · Specialist cost and management accounting techniques

Section B - Case 1: AeroDrone Tech

AeroDrone Tech is an agricultural technology startup developing the 'AgriScout', a drone designed to monitor crop health. Market research indicates that large-scale farms would be willing to pay $1,200 for such a drone. AeroDrone's investors require a profit margin of 20% on the selling price. The current estimated production cost of the AgriScout is $1,050.

Which TWO of the following actions would be appropriate methods for AeroDrone to close the cost gap?

Answer options:

A.

Increasing the selling price to $1,312.50 to maintain the 20% margin.

B.

Utilizing standard components instead of custom-designed parts.

C.

Conducting value analysis to remove features that customers do not value highly.

D.

Reducing the required profit margin to 12.5%.

How to approach this question

Look for cost reduction techniques that occur during the design phase (value engineering, standardization) rather than changing the market price or investor requirements.

Full Answer

To close a cost gap, a company must reduce its estimated costs to meet the target cost. This is typically done through value engineering, utilizing standard parts, training staff for better efficiency, or negotiating better material prices. Increasing the selling price or reducing the profit margin violates the core principles of target costing, which are market-driven and investor-driven respectively.

Common mistakes

Selecting 'Increase selling price'. In target costing, the selling price is fixed by the market.
17All questions19

Practice the full ACCA PM — Performance Management Practice Exam 6

32 questions · hints · full answers · grading

Sign up freeTake the exam

More questions from this exam

Q1**Section A** A global logistics NGO uses Big Data analytics to optimize its disaster relief sup...EasyQ2**Section A** FinTech Innovators Inc. is migrating its management accounting systems to a public...MediumQ3**Section A** A commercial forestry company uses an Executive Information System (EIS) to monito...EasyQ4**Section A** SolarTech manufactures solar panels. The factory has a total operating cost of $12...MediumQ5**Section A** A chemical manufacturing company is implementing Environmental Management Accounti...Medium
View all 32 questions →