1. avatar 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

  2. avatar 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?


    • Profile photo of 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.

  3. avatar 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

  4. avatar 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!!!

    • Profile photo of 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 :-)

  5. avatar 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

    • Profile photo of 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.

  6. avatar 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 :)

Leave a Reply