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These are the questions from kaplan kit.
Mcq 17) the predicted selling price for a products has been set at $56 per unit.The desired markup on cost is 25% and the material cost for the product is estimated to be $16 before allowing for additional materials to allow for shrinkage of 20% (for every 10kg of material going in only 8kg comes out). if labours is the only other cost and 2 hours are needed what is the most the business can pay per hour if a cost gap is to be avoided?
The maximum rate per hours is ____?mcq 18) the target cost for a product has been calculated to be $38.00, which is 5% less than the actual cost currently achievable. the business is considering providing some internal training to improve efficiency of labour and hence reduce the cost gap. the current material cost is $10 per unit and this will not change as efficiency changes. labour rates are $8 per hour.
How much of an efficiency improvement(measured by the % reduction in labour time per unit will be necessary to remove the cost gap completely).i would be very regretful if you kindly solve and explain these questions to me.
Please do not expect me to produce full answers to questions. You must have answer in your revision kit and so you should ask about whatever it is in the answer that you are not clear about – then I will help you 🙂
For the first question, for there to be a 25% mark-up and a selling price of $56, the target cost must be 100/125 x $56 = $44.80.
The material cost per unit is 10/8 x $16 = $20 per unit. Therefore the total labour cost per unit to avoid a cost gap must be $22.80.For the second question, the current actual cost must be $38 / 95% = $40 per unit and this must be reduced by $2 to remove the cost gap. Since only labour changes, the labour cost (and therefore the labour time) must fall by $2 on a current $10, which is 20%.
Have you watched my free lectures on target costing? The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.
Hello sir, as for question one (a), I really think that the question was wrongly asked?
It should have been to calculate the Minimum rate to ensure no gap and not the maximum.
Actually, I believe that a cost gap exists only when Target cost < Estimated cost.
What I mean is, even though Estimated cost < Target cost shows a difference, it is not a cost gap.
This is because I wouldn’t bother with closing the gap because by doing so, I would decrease my returns either by decreasing my % markup or by deliberating increasing costs of production.
So, target costing should not extend to cost gap considerations when Target cost > Estimated cost,
except if we decide to lower our selling price to down below prevailing market prices so as to fend off competition from rivals.So, my conclusion:
If Target cost < Estimated cost, there is a Cost Gap,
If Target cost > Estimated cost, there is no Cost Gap.
Am I right sir?
You are right about what you wrote at the end.
However you are wrong is saying that the question was wrongly asked!
The question does not give the current labour cost – it asks what the maximum labour cost is to avoid there being a cost gap. If the total labour cost is more than $22.80 per unit, then the actual cost will be more than the target cost and there will be a cost gap. Therefore $22.80 is the maximum if they are to avoid there being a cost gap.
Yes sir I see.
I messed up in interpretation and talked about the minimum rate above which a cost gap would be created, which is the reverse.Thank you sir.
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