# TARGET COSTING-EDWARD CO. DEC. 2007

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This topic contains 9 replies, has 4 voices, and was last updated by  John Moffat 1 year, 5 months ago.

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• Tenuvi
Member

I will like to know why in arriving at the desired profit,margin was changed to mark up to arrive at the answer. In the question,it was stated that the board have agreed that the acceptable margin(after allowing for all production costs) should be 20% and it was also stated that selling price is \$44. I think since margin is calculated on selling price, we could have just found 20% of \$44, to arrive at our desired profit. Am a bit confused as to how it was treated in the solution. Please explain.

John Moffat
Keymaster

What you have typed is correct.
So…if the selling price is 44.00 and the desired profit is 20% x 44 = 8.80, then it means that the target cost is 44.00 – 8.80 = 35.20.
This is the figure in the answer – “the desired cost = 35.20″
We compare this with the estimated cost ( 35.928) and the difference is the cost gap.

Tenuvi
Member

Tanx a lot!

John Moffat
Keymaster

You are welcome.

ndachuwa
Participant

@johnmoffat said:
What you have typed is correct.
So…if the selling price is 44.00 and the desired profit is 20% x 44 = 8.80, then it means that the target cost is 44.00 – 8.80 = 35.20.
This is the figure in the answer – “the desired cost = 35.20″
We compare this with the estimated cost ( 35.928) and the difference is the cost gap.

If the selling price is 44 and the mark up is 20% then cost is 44/1.2= 36.67 and not 35.928.

John Moffat
Keymaster

<cite>@ndachuwa said:</cite>
If the selling price is 44 and the mark up is 20% then cost is 44/1.2= 36.67 and not 35.928.

But the question makes no mention of a mark-up.

It says a margin of 20%, and a margin is a percent of selling price.

Also, I did not write that 35.928 is the target cost at all – it is the estimated actual cost.

What I wrote above in answer to the previous question is completely correct!

No way
Participant

I feel a bit tricky while I calculate allowance for waste and idle time of this question. Why multiply by the factor 100/90 is more correctly. I calculate by adding more time/material to come to actual figure this way seem incorrect as examiner’s report. Please explain for me?

John Moffat
Keymaster

The point is that for every 100 hours we pay for, only 90 hours are actually worked (because 10% of the hours paid are idle).

Putting this the other way round, for every 90 hours we work we need to pay for 100 hours.

So….if we work for (say) 180 hours then we need to pay for 200 hours (180 x 100/90)

The same logic applies to the wire also.

No way
Participant

I hv got this in otherway:
Efficiency ratio = expected time(=0.5 hrs)/actual time = 90/100 => actual time = 0.5 hrs x 100/90.
The same applies for the wire.