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Target Costing

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  4. 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

    • 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.

      • 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.

  7. Great Lecture. I just have one question…. where did you get the $34 that was used as the estimated actual cost? Was that amount just use to show how you work out the cost gap?

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