Comments

  1. Avatar of Vera says

    Sir, can you please tell me when calculating the expected cost per unit how I should treat with wastage and idle time. I’m doing a Dec 2007 past paper which includes both.

    • Avatar of John Moffat says

      (This isn’t actually a target costing problem – it could be in any question where you have to calculate the expected cost. In future, please ask in the Ask the ACCA Tutor F5 forum rather than as a comment under a lecture. :-) )

      However……wastage and idle time are really the same problem
      Suppose that 10% of the materials that we buy are wasted.
      That means that for every 100 kg we buy, 10kg are wasted and so only 90 kg are available for production. Or, to put it the other way round, for every 90 kg we need for production we will need to buy 100 kg.
      So….if we need (for example) 450 kg for production, then we will need to buy 450 x 100/90 = 500 kg. (and it obviously checks, but 500, waste 50 (10%) and you are left with the 450 you need).

      It is exactly the same idea for idle time. Instead of materials to buy, it is hours to pay for. Instead of wastage it is idle time. Instead of materials needed for production, it is hours we need to work.

  2. avatar says

    Dear John

    I had not realised the value of your lectures until now that I want to sit for my F5 exam on June 2nd 2014. I however feel that on your explanations of closing the “cost gap” you did not talk about varying production levels. Here I am talking about economies of scale. I hope the cost we are talking about is not just the variable cost but also the overheads i.e fixed costs.

    Won’t that be another way of closing the cost gap?

    Thank you.

    • Avatar of John Moffat says

      Possibly.

      However, the problem is that economies of scale would be achieved by producing more. But there would only be point in producing more if we could sell more, and that would likely mean having a lower price.

      You would usually expect the estimate of reasonable selling price to be tied in with estimate of likely demand.

  3. Avatar of mehnoor says

    Hello Sir… After your lecture notes and video, i am going through the practice question at the end of the lecture notes. I am doing the 2nd Question on target costing right now and going through how u tackled the question. I have noticed that your answer is in a more general format rather than specifically for the question itself. I wanted to know if your answer is the way to answer it or it should be done in a more customised way that is adapted to the question.

    Like for example, to make it clearer what i am trying to say. For the first part of the question where it is asked to “Briefly describe the target costing process that Edward Co should undertake.”
    Your answer begins with “Target costing begins by specifying a product an organisation wishes to sell” .. BUT in the question, Edward has already decided what the product is…

    Can u help me please. Thanks bunches.

    • Avatar of John Moffat says

      That question is actually a past exam question.

      Part (a) is asking more generally about target costing – it is part (b) where the numbers become relevant.

      For that reason it is best for part (a) to outline the steps involved in target costing.
      However, for the reasons you state, the first line is not really necessary :-)

  4. Avatar of nzeadall says

    Dear sir
    Thank you very much for the excellent lecture, I have a question for paper Dec 2007, Q1 on target costing, I see that production overheads have been calculated including the “idle time”, it says the ” Fixed production overheads are absorbed on an assembly hour basis,” and we had an idle time for the labour hours in assembly For overheads shouldn’t we exclude idle time?

    Also, I see in the answer that they applied High/Low method for the variable O.H. I have taken only an average of month 1 and 2 to get the O/H per assembly hour. I got $31.43 /hr
    I then calculated the number of radios which could be produced for (240 K hours – idle time = 216 K hours ) I got 432 000 radios. I then calculated total O/H per year (216K hours * $31.43). Per radio the O/H = $6,778,880 / 432000 = $ 15.72. The answer $10 (Var) + $6 (Fix).
    Are we penalised for merging both Var + Fix as a single price absorption?

    Please help me on these points. I’m really relying on your assistance.

    Thank you very much

    • Avatar of John Moffat says

      With regard to the idle time, you have misread the question. It says that each unit takes 30 minutes to make. This is after the idle 10% (which is why when calculating the labour cost it has to be grossed up by the idle time to calculate the amount actually paid). For absorbing the overheads, only the time worked (30 minutes) has been taken into account.

      With regard to high/low, you would be penalised for taking an average. (You would not fail the question just because of that, but you would lose marks).
      High/low comes up quite often as a tiny part of all sorts of questions, and so it is worth making sure that you are happy with it.

  5. avatar says

    Dear Sir,
    I am taking F5 exam at this December. I just start my study for F5. I am self study and just study open tuition’s lecture, note, revision and flash card. I am do so at my F2 n F3.
    My planning is just study whatever in the opentuition and do pass year question.
    I know that the F5 pass rate is very low, just less than 50%.
    Do you think enough for me to take F5 exam?
    Kindly advice.

    • Avatar of John Moffat says

      It is enough, provided you practice lots of questions. Best is to get hold of a revision / exam kit from one of the approved publishers, because they have lots of questions to practice.

      Also remember that 50% of the exam will be writing (not calculations) and so make sure you really understand the topics and that you are not simply learning rules.

  6. avatar says

    Dear Sir,
    I have few problems that really need your help. I have been doing freelancing. I am trying to manage my workload to as part-time. My main problems are these:
    Although I am reading my text + your course notes and lectures. But when after a day it seems like I dont know anything. I become heavily confused. When I sit to do kit questions, I find it really hard to write though my english is superb. Where to start from, how much to write, what to write etc etc…I am really thrilled by these problems. I was a sharp student not a dumb, I pick everything so fast but I am not sure what happened to me.

    Please help me, otherwise I am really depressed. I am trying to tackle this by whatever I read, I planned to write it down in my own words as paragraphs. But I know it takes lots of time and people give priority to pick practice questions instead. Please help me! Please help me!

    Kindly give me a detailed response and motivation. It will work more than your video lectures to me. I have high motives but this problem is becoming a barrier.

    Many Thanks

    • Avatar of John Moffat says

      It is very difficult to be too detailed because everyone studies in different ways.
      I don’t know how many papers you intend to take in December, but try not to study too much at once – it is a good idea to prepare yourself a plan. You can see how many chapters there are in the course notes and then spread them over the number of days that you have available for study.
      Writing down your own summaries of what you have learned is a good idea (even though it obviously takes time). I always used to find that writing it down myself was the best way of remembering things, however easy some things might have seemed when I was listening to someone else explaining.
      Certainly most important of all is practicing questions, but do remember that for the written parts the examiner (and the published books) always write much more than is expected because they know that people use the answers to learn from (and studying the examiners answers to written questions is certainly a good way of learning).
      Two things on here might help a little. You will find linked from the F5 main page is list of the topics in past exam questions, and so when you have been through a topic then it is a good idea to practice some of the relevant questions (although bear in mind that many questions examine more than one topic).
      The other thing is that also linked from the F5 page are my own video answers to several past exam questions. When I go through the question I try to explain the way I am approaching it. Also, my written answers are a better indicator of the amount you can be expected to write than the examiners own answers.
      When you do get depressed then take a few days off studying. The problem is that once you get depressed (and tired) then everything starts going wrong which just makes you more depressed!!! A few days break refreshes you and then things that seemed difficult suddenly make sense :-)

      • avatar says

        Extremely thanks to you! I think more than 90% of the problem is solved here. I am more convinced now. I dont need any breaks though, Your motivation was the point of satisfaction for me. My 3chapters ABC, target and life cycle are done. Tomorrow I plan to see your throughput costing lecture and notes.

        I am taking F4, F5 for the exam session.

        Many Thanks

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