1. Profile photo of Sherls says

    Hi Sir

    I will like to ask for clarification on the following question which I have now started doing in preparation for June 2015 exams from the BPP exam kit:

    Que: Given the following information what is the target cost gap for product X?
    Product X target selling price per unit
    Target profit $10
    Current Cost $ 8.40 per unit

    I thought it was easy and calculated came up with $0.40

    (10 x 25% = $2.50, then , 10 – 2.5 =7.5
    Gap – ($8.40 – $7.50=$0.90)

    but the answer was $0.40)

    I don’t understand why even though the calculation given at the back of the book in answers was:

    $10 x 20% = 2, then , 10 – 2 = 8
    Gap – ($8.40 – $8.00 = $0.40)

    Why did they use 20%?

    It is confusing to me because I know the question asked for 25% ON COST at which i first interpreted it to be 25% of 8.40
    But when i calculated it this way there was no answer options if i did that.

    I will gratefully appreciate your assistance.

    Thank you

    I hope i explained myself properly

    • Profile photo of John Moffat says

      In future you must ask this sort of question in the Ask the Tutor Forum (as I told you before) and not as a comment on a lecture.

      First, the whole point of target costing is that the target cost is calculated from the selling price (and is then compared with the actual estimated cost). Watching the lecture should help you on this.

      Secondly, if they want a markup of 25% of cost, then for every $100 cost, the profit would be $25, and therefore the selling price would be $125.
      Putting it the other way round, for every $125 selling price, the profit will be $25, which is 25/125 = 20% of the selling price.

      • Profile photo of Sherls says

        ok thanks sir. and

        I apologise about asking the question here, I have never used the tutor forum before as studying with open tution is quite new to me. I guess I misunderstood where you meant when you told me that I should use the tutor forum for these types of questions.

        I will further acquaint myself with open tution so that this mistake doesn’t happen again. Sorry about that.

        thanks to the response to the question.

  2. avatar says

    hie john thank you for the wonderful lecture on target costing, however am finding much difficulties in uploading the studio version perhaps due to the kind of player used its been an hour and some minutes but i have not done not even 10 minutes of the lecture, my internet performance is quit good and i trust itt is there ant other way i can do to speed the uploading?

    • Profile photo of John Moffat says

      Thank you for your comments.

      With regard to the speed, all the lectures from this end are at the same speed.
      All I can suggest is:
      – try another browser
      – try another internet provider
      – wait until the lecture is finished, then replay – then it will run at normal speed.

  3. avatar says

    Goodday John,

    Thanks so much for the lectures, they are really very helpful for me since am doing self study. I have a bit of issue with calculating the production overhead costs for question 1, part B at the end of the lecture note. Please can you or anyone help on with it.


    • Profile photo of John Moffat says

      I will have to ask you to ask this question in the Ask the Tutor Forum and not here (this is for comments on the lecture, and the question you refer to is Activity Based Costing which is a completely separate lecture).

      If you ask in Ask the Tutor and say which bit of the answer is causing the problem, then I will try and help you.

  4. Profile photo of Thanana says

    The other target costing videos are super, but this one has a major problem on the sound, you might consider replacing it with a new lecture. It’s good that it sounds as if it is a repetition of the previous ones.
    Thank you guys for coming up with this website, it gives me hope to pass my exams, and you might consider a pathway to donate to it, since you may be able to improve on the lectures and whatsoever else, by sourcing different and necessary resources.
    Thanks again, i love opentuition.

  5. avatar says

    Hi Sir, i have a question regarding the “Rexamine the Design ” the way of Reducing gap.
    If we Changed the Design or we use the less material it will effect the sale of our product as we have to make our product more attractive for the customers?

  6. avatar says

    Hi Sir, just finished Target and Life cycle costing. I’m working past paper question. There is a full theory question of the two chapters. Here is the question:

    GEEWHIZZ, a manufacturer of computer games, has developped a new game called Action Accountant(AA). This is an interactive 3D game and is the fisrt of its kind to be introduced to the market. GEEWHIZZ is due to launch the AA in time for the peak selling season.

    GEEWHIZZ has been using traditional absorption costing system to calculate costs and price its products. The new management accounrant believes that this is innapropriate for this company and is arguing for a new approach to be adopted.

    As Management accountant of GEEWHIZZ, do the following.

    (a) Discuss the principles of the following techniques and explain how each could have been applied to the AA.
    -Life Cycle Costing
    -Target Costing

    (13 Marks)

    Part(b) is just calculation, so no problem. It’s just for part(a), I’ve looked for the answers and it’s almost full 2 pages written of answer written in the exam kit. I think for 13 marks, is it not too much? And while giving my answer, should I explain the above costs or should I compare them with traditional absorption costing as well?

    I’d really appreciate if you could give me an answer that would get all 13 marks but maybe a bit more concise.

    Thank you sir :)

    • Profile photo of John Moffat says

      That is not a past Paper F5 exam question.

      I assume that you found it in one of the Exam/Revision Kits – it is a question invented by the publishers.

      The printed answers are far longer than you would be expected to produce in the real exam (the examiners own answers to real exam questions are the same) – it is because they are useful to learn from.

      What you should be after is aiming to make one point per mark (it is not always like this – but usually it is one mark per point). Each point need only be brief.
      Best is to look at real exam questions and the marking scheme – the marking scheme tells you what points the examiner is after and how many marks were given for each point.

      • Profile photo of John Moffat says

        The examiners answers on the ACCA website (to the written parts of questions) are the same in that they are much longer that what is expected from students.

      • Profile photo of John Moffat says

        You should be trying to think of 13 points to make.

        Overall you should briefly explain what is meant by target costing, outline the steps involved, and state the benefits.
        The same for life cycle costing.

        These points are covered in my lectures. Have a look at recent past exams – both topics have been asked as written parts of questions (although in separate questions). Again, bear in mind that the examiner always writes more than would be expected – look at the marking schemes to see what points the markers were looking for.

  7. avatar says

    Sir can u plz tell me how we got the Target cost=7 in the (a) part example 1 of life cycle costing

    as far as i think( 6 p.u )=manufacturing cost + design development cost 60000/50000= (1.2 p.u) …so it should be 7.2 p.u
    and i do not know whether we should consider end of life cost when computing the target cost. Kindly make it clear what costs to be considered in target costing

      • Profile photo of John Moffat says

        The target cost is calculated as the maximum cost we can have if we are to make the target profit.
        Here, the selling price is 10.50 and we want the profit to be 50% of cost.
        If the target cost is x then we want profit of 0.5x and so the selling price will be 1.5x
        If 1.5x = 10.50, the x = 7.00 (the target cost)

      • Profile photo of mario123 says

        Sir can you please explain what’s happening in part c of this question? I don’t get why $2.20 of cost per unit didn’t include the original manufacturing cost? And the fact that the new manufacturing cost is calculated by subtracting this cost per unit (2.20) from the target cost (7)? Don’t get the logic

      • Profile photo of John Moffat says

        I will explain it a different way.

        The target cost is $7 – that is the cost we are aiming for if we are going to make the required profit.

        At the moment, the lifecycle cost is $7.80 per unit, and so we need to reduce it by $0.80 to get down to our target,
        Paying an extra $20,000 for design will itself put up the lifecycle cost by 20,000/50,000 = 0.40 per unit – so it will go up to $8.20 per unit.

        To get down to the target of $7 per unit, we therefore need to reduce the lifecycle cost by $8.20 – $7 = $1.20.
        Currently the manufacturing costs are $6 per unit, and so reducing them by $1.20 means that we need to bring them down to $4.80 per unit.

  8. Profile photo of mirnezami says

    Thanks for the fantastic lectures, i am receiving “Server not found: rtmpt://” error all the times today, I should try many times to be able to watch a video. please see if the problem is from the servers.

      • Profile photo of zain25 says

        @admin, bro iphone doesnot support flash sites …
        websites runs very well on it but video does not play on it .
        please tell me the way how u look lectures on iphone

      • Profile photo of zain25 says

        @johnmoffat, bro no its not working … i tried a lot . they are giving me message that flash videos are not supported ….i have done it my times but same result iphone safari is not opening the videos . site is opening fine but video lectures are not running on safari

      • Profile photo of zain25 says

        @admin, sorry admin u r not understanding the problem .
        i have iphone 3gs and safari is not running the lectures i opened it many time its not working

      • Profile photo of admin says

        @zain25, Lectures work fine on phone 4 and ipad 2
        and I am 99% sure, in the same way they work on iphone 3gs.
        – but since I don’t have 3gs, can’t verify it.

        however, i would tend to think problem might be somewhere else..
        send me some screenshots of your screen with those errors from your phone, (to create screenshot press home and power buttons at the same time)

  9. avatar says

    What happen if the target cost > estimated actual cost?
    What we would do?
    1. Increase profit
    2. Decrease price
    3. add more equipment to goods
    Please tell me about effect if we do that option
    Thank you!

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