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mambo.emma says

Hello John thanks a lot for this lecture. I’m in Kampala (Uganda) and preparing to sit for F5 this Dec. However I came across this target cost number that has been driving me crazy I really need some explanation. Question is follows;

Target selling price $20 per unit

Target mark-up on cost 1/3

Estimated production cost $16 per unit

Find the cost gap

John Moffat says

The markup is 1/3 on cost. So the target cost is $15.

Therefore the cost gap is $16 – $15 = $1

(In future please ask this sort of question in the Ask the Tutor Forum for F5 )

Robert says

Hello John,

I was wondering if during the lecture a mistake was made. You said the cost of producing the table is $12. However, you answered a question from Javid and you gave the calculation to be 100/140×20= $14.27

Should the $12 in your lecture be $14.27 instead?

Thanks.

John Moffat says

There is no mistake.

Firstly, I never said that the cost of producing the table is $12. I said that the target cost was $12 – that is the maximum cost that we can afford if we are to make the profit we want. We then compare this $12 with the actual cost.

Secondly, the question says that we want a profit of 40% of selling price. (I assume that you have downloaded the free Course Notes – if not, then there is no point in watching the lectures. It says above each lecture that they are based on the Course Notes and gives the link to download them).

The $14.27 was simply explaining that if instead the objective had been to get a profit of 40% of cost, then the target cost would indeed be $14.27. However in this question the objective was 40% of selling price, and so the target cost is indeed $12.

Robert says

Thank you very much for the clarification. My humblest apologies, I did not read the question properly.

John Moffat says

No problem

javid says

hi sir john.. i need your help.

product A target selling price per unit is $10

target profit is 25% on cost

current cost $8.40 per unit

what is the target cost gap for product A???

pls answer me…. many thanks

John Moffat says

If the target profit is 25% of cost, it means that the target cost is 100/125 x 10 = $8

So the cost gap is 8.40 – 8 = $0.40

javid says

thank you very much sir..

so how do you calculate can you explain to me pls

javid says

i always confused with this .. what to take as a cost and selling price

is it cost +profit=sp

or

sp=cost+profit

i don’t get that .. very confusing

John Moffat says

It doesn’t matter which way round you write the equation – it is the same both times!!

Profit is 25% of cost, then for every $100 cost then the profit must be $25

As you have written, the selling price = cost + profit (surely, obviously!) and so for every $100 cost, then selling price must be $125.

Or, for every $125 selling price, the cost must be $100.

Here, the selling price is $10. So the cost must be 100/125 x $10.

javid says

Thank you very muchhh sir ..god bless you ..

John Moffat says

You are welcome

Rajasekaran says

Mr.Moffat, I really enjoyed this lecture to well. My question is Target Costs are planned estimated costs before production schedule. What will happen if the cost input escalate all of a sudden after the production commences? Secondly, Can Target Costing combat under hyperinflationary economic conditions to sustain pricing?

Thank you!!!

John Moffat says

Firstly, target costs are not planned estimated costs. The target cost is the cost that has to be achieved in order to get the required level of profitability. The company will compare this with the estimated costs – if the target cost is lower than the estimated cost, then they will look for ways of reducing the estimate actual cost.

Target costing is not intended (and can not) combat high levels of inflation.

Obviously estimated levels of inflation will be taken into account is determining the target cost (and in estimating the likely actual cost), but target costing itself cannot remove the risk that always exists.

I am pleased that you enjoyed the lecture

Noura Dahmash says

thank you sir, your lectures are very explanative and to the points without turning around the subject tooo much , it eases the paper to me, thanks

zshan says

iss mai kya easy tha

Adam says

Another excellent lecture John and some enjoyable banter at the end.

cris says

Great lecture! Sir you really make our learning Interesting… I have a question that is bothering me. What if the estimate of actual cost of production turns out of to be incorrect. Afterall, it is an estimate, it would turn out to be a bad decision if the actual cost turned out to be more than what we estimated.? What would we do in that situation.? As you said we work out target cost before actually making products, if we started producing how do you see the effect of wrong estimate in the first place ?. Cheers

John Moffat says

Thank you

All of costing is based on estimations and there is always the risk that the estimates are wrong.

The whole point of target costing is that the cost is driven by the selling price (and not the other way round as is traditionally the case).

Obviously it is important that if they do go ahead that they make sure the control the costs. If the costs get too high then they would have to consider whether it was possible to increase the selling price or whether to accept a reduced profit, or even whether they should cease production.

cris says

Thank you very much sir. clears my concept thoroughly

John Moffat says

That’s good

payalaggarwal1 says

John I love your lectures. You make them so interesting with your very British sense of humour. Thank you so much.

John Moffat says

I am pleased you enjoy them – thank you

dbasvi says

I am really enjoying your lectures, thank you.

John Moffat says

Thank you very much for that – I hope that you continue to enjoy them

furhana says

thank you your lectures are wonderful

Tyler says

Hi Sir, what is the difference between the studio recorded lecture and the normal one apart from the normal one being longer in time. Which one should we follow or should we watch both the live and the studio one to get a better understanding?

Thank you

John Moffat says

The only difference is the quality – the recordings in the classroom are not always as good quality because I walk around a lot

chezya says

Interesting lecturer!! He knows how to keep his students awake with nice atmosphere in the class!

jessntkt says

your examples made things easily to understand. I enjoy your lecture very much! Now i can say bye to all my previous sleeping time during class

Mahoysam says

Such a fun and interesting lecture!! I wish I could attend in there.. really nice atmosphere in the class!

clairgriffiths123 says

Fantastic lectures, put my local colllege to shame! Where are these lectures done?

mubaba says

im having a problem loading the f5 video lecture

John Moffat says

The lecture is working fine – I think the problem is with your computer.

farhana001 says

Easy to understand …Thanks OT