Accounting Q&A · Cost and Management Accounting · Topic 22
Work through the questions, then reveal the answers to check your reasoning.
25 short-answer questions. Try each question before revealing its answer.
Worked example
The expected selling price is 120 and target margin is 25% of sales. Target cost is 90. If the current design costs 98, the design team needs to close an 8 cost gap.
Core concepts
1. What is target costing?
Start from an expected market price and subtract target profit to set an allowable cost.
2. What is a target cost gap?
Estimated current cost less allowable target cost.
3. What is value engineering?
Review product functions to reduce cost while preserving needed performance and quality.
4. Why address costs at the design stage?
Design choices often commit much of the cost before production begins.
5. What is life-cycle costing?
Estimate costs from development through production, use, support and end of life, depending on scope.
6. What is the difference between producer and customer life-cycle costs?
Producer costs track the business’s spending. Customer costs include purchase, ownership and disposal costs relevant to the buyer.
7. What is a prevention cost?
Spending to avoid defects, such as process training.
8. What is an appraisal cost?
Spending to assess quality, such as inspection and testing.
9. What is an internal failure cost?
Defect-related cost incurred before delivery, such as scrap or rework.
10. What is an external failure cost?
Defect-related cost after delivery, such as warranty repairs.
Worked applications
11. Market price is 80 and desired profit is 20. What is target cost?
60.
12. Market price is 80 and target margin is 20% of sales. What is target cost?
64.
13. Estimated cost is 70 and target cost 64. What is the gap?
6 per unit.
14. For 4,000 units, what total reduction closes a 6 unit gap?
24,000, assuming the gap applies to every unit.
15. Training costs 3,000 and prevents expected rework of 5,200. What is expected net saving?
2,200, assuming no other changes.
16. How should testing new units be classified?
Appraisal cost if testing assesses whether units meet specifications.
17. How should repairing defective units before shipping be classified?
Internal failure cost.
18. How should compensating a customer for a defect after delivery be classified?
External failure cost.
19. Development costs 30,000, production 100,000 and warranty 10,000. What is total life-cycle cost?
140,000 assuming the model includes only these costs.
Review and exam practice
20. If 7,000 units are sold, what is average life-cycle cost per unit?
20 using total life-cycle cost of 140,000.
21. Why distinguish committed and incurred costs?
A design decision can commit future spending before the cash is paid or expense recognised.
22. Why include product withdrawal and disposal?
End-of-life obligations can affect total cost and the choice of design.
23. When should life-cycle cash flows be discounted?
When comparing amounts at different dates and the time value of money matters.
24. How can quality metrics support cost analysis?
Connect defect rates, returns and rework hours with spending to identify causes.
25. What should a cost reduction proposal demonstrate?
Show the expected saving, evidence, impact on customer value and risks to quality.