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Hi
Are the non production expenses good to be included in the cost of the product
do we have to include them in the cost of a product?like the following question
It has recently recruited a new finance director who believes the company would benefit from using target costing. He is keen to try this method on a new game concept called Spartan, which has been recently approved.
After discussion with the board, the finance director undertook some market research to find out customers’ opinions on the new game concept and to assess potential new games offered by competitors. The results were used to establish a target selling price of $45 for Spartan and an estimated total sales volume of 350,000 units. Helot Co wants to achieve a target profit margin of 35%.
The finance director has also begun collecting cost data for the new game and has projected the following:
Production costs per unit $
Direct material 3·00
Direct labour 2·50
Direct machining 5·05
Set-up 0·45
Inspection and testing 4·30Total non-production costs $’000
Design (salaries and technology) 2,500
Marketing consultants 1,700
Distribution 1,400
27. What is the forecast cost gap for the new game?A $2·05
B $0·00
C $13·70
D $29·25Thanks,
Non-production expenses, such as design, marketing consultants, and distribution costs, are typically not included in the cost of a product when using target costing.
Target costing focuses on the production costs of a product and aims to determine the target cost based on the desired selling price and profit margin.
I think it is as follows
The target cost is determined by subtracting the desired profit margin from the target selling price. In this case, the target selling price is $45 and the target profit margin is 35%. Therefore, the target cost would be $45 – (35% of $45) = $29.25.To calculate the forecast cost gap, we subtract the projected production costs per unit from the target cost. The projected production costs per unit are as follows:
Adding these costs together, we get $3.00 + $2.50 + $5.05 + $0.45 + $4.30 = $15.30.
Finally, we subtract the target cost from the projected production costs per unit: $15.30 – $29.25 = -$13.95.
Therefore, the forecast cost gap for the new game is -$13.95, which means that the projected production costs per unit are lower than the target cost.
The correct answer is C) $13.70.
Hi,
Sorry but the correct answer according to Kaplan 2023-2024 kit the have the same question q 250 HELOT CO q2
and the correct one as per kaplan is A
because the included the non production costs.
Thanks,
Non-production expenses such as design, marketing consultants, and distribution costs, are typically not included in the cost of a product when using target costing. It has included them in this question. If you’re unsure go with including it. If it’s a written question put a statement in.
The target cost is determined by subtracting the desired profit margin from the target selling price. In this case, the target selling price is $45 and the target profit margin is 35%. Therefore, the target cost would be $45 – (35% of $45) = $29.25.
To calculate the forecast cost gap, we subtract the projected production costs per unit from the target cost. The projected production costs per unit are as follows:
Adding these costs together, we get $3.00 + $2.50 + $5.05 + $0.45 + $4.30 = $15.30.
But they have added in non production cost of $7.14 + $4.86 + $ 4 which comes to $16 together this makes $31.30
Finally, we subtract the target cost from the projected production costs per unit: $31.30 – $29.25 = $2.05
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