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Life cycle costing (part 2) - ACCA Performance Management (PM)
52 Comments
L
Lee·
Do you mean that actually the element of the target cost involving all costs across the life cycle of the product, instead of being limited to production cost only?
J
John MoffatTutor·
Yes :-)
R
R·
Can you please elaborate on the cost gap and why it wouldn't meet the required profit levels using calculation?
K
Khalid·
Question C; I calculated Manufacturing cost per unit $4.8 per unit. Here's how I did it;
Total lifecycle costs ; Design 80,000 + End life costs 30,000 + Manufacturing cost per unit * 50000 = x (X means Total lifecycle cost)
X divide by 50,000 = $7 ($7 is the Required Lifecycle cost per unit which removes the Cost gap of 0.8).
Now I want to calculate Total lifecycle costs as Units * Lifecycle cost per unit ( 50,000 units * $7 : $350,000 )
this amount ($350,000) consists of 80,000 of Design, 30,000 of end life costs and $240,000 of manufacturing costs. I calculated the $240,000 using balancing figure.
Manufacturing cost per unit : $240,000 divide by 50,000 units = $4.8 per unit.
Z
Zunaib Khan·
cost per unit is a variable cost so we have to first allocate fixed costs and then decide for the variable cost. if you focus on question in first part it says that desirable cost is 50000*7=350000. so this is the max we can spend to produce the product. after allocating fixed costs we are left with 240000. and this is the amount we have to allocate to the cost per unit as our max variable cost.
just basics we cant change fixed cost so have to work on our variable costs to reduce cost.
R
Razin·
Hi John,
Just a short note to thank you for all your lectures (I am currently revising FM and PM to prepare after an 8 year working hiatus for my SBL) and I greatly enjoyed (and still do) your videos. and so much respect for your patience and diligence to answering questions in the comment section (though I believe there is the Ask The Tutor forum for this ;) )
regards,
Razin
J
John MoffatTutor·
Thank you for your comment :-)
J
JojoBeat·
Hey Sir,
When calculating the lifecycle cost, do we include only relevant costs or all costs for example depreciation and R&D cost already incurred?
J
John MoffatTutor·
All costs (but not depreciation because including the initial cost of equipment and any sale proceeds is already including that amount).
J
JojoBeat·
Certain Kaplan questions have excluded opportunity costs & sunk R&D costs. Is there any reason for this?
H
Hermela·
sir, i am really grateful to find this open tuition..but i dont get the concept of end life cost?
J
John MoffatTutor·
Maybe the production needed special equipment that needs dismantling at the end of the production (and dismantling it costs money).
D
divyaj·
hello, sir in previous target costing lecture you explained that if profit is 50 percentage on cost then we does like 25/125*50, so profit is 10 and then target costing = selling price-profit as 50-10=40....
but now you have done target cost= 100/150*10.50=7, i dont understand this
why we cant do like first we get profit and subtract from selling price.....
J
John MoffatTutor·
In the target costing lecture example the profit was given as a % of the selling price.
In this example the profit is given as a % of the cost. So for every $100 of cost, the profit is $50 and therefore the selling price would be $150.
Putting it the other way round, for every $150 selling price the cost is $100. Therefore if the selling price is $10.50 the cost must be 100/150 x $10.50 = $7.
(And, of course, it checks. If the selling price is 10.50 and the cost is 7 then the profit is 3.50, which is 50% of the cost)
D
divyaj·
ok, now got it, thank u so much
A
Abubukr·
Hi, in the 1 target costing lecture video, the lecturer mentioned "profit of 25% of the cost " and in the other example was also 50% makeup of the cost. that's why it confuses all of us can you please confirm?
S
shakir7385·
Dear John,
As if the estimated cost is more than the target cost, the difference is called Cost Gap. What if the target cost is greater than estimated cost, would the difference still be called the Cost Gap?
J
John MoffatTutor·
No. If that is the case then it is just that there is no cost gap :-)
G
grishaparikh·
Thank you so much for the time and effort put into these lectures and notes. We greatly appreciate it.
J
John MoffatTutor·
Thank you for your comment :-)
B
binidire·
Thank you.
J
John MoffatTutor·
You are welcome :-)
T
T.·
Hi Sir, thank you for the lecture. I'm still quite confused. I just wanted to understand how you would calculate the target profit (step 2 in the target costing calculation).
I get the selling price is $10.50
step 2? required profit
step 3 target cost $7
without the short cut example in video please.
T
T.·
Ignore me I understand now
J
John MoffatTutor·
I am pleased that you now understand :-)
I
Ibrahim·
Lectures are great: short, but very clear and informative.
Thank you very much for your time and effort these informative lectures were the reason to select ACCA rather than CPA.
Thank you sir thank you so much
J
John MoffatTutor·
Thank you for your comment :-)
A
adch111·
Hi,
In part C) I calculated it using your method but also tried another method that didn't work and I was hoping you could possibly spot the error.
I took the increase of 20,000 and divided by the number of units produced. Giving 20,000/50,000 = 0.4. This should equate to the increase in cost per unit. Thus to compensate you take the 0.4 from 7 to give $6.6 pu. However it is clearly wrong. Why is this?
thanks
Y
yue·
The question is asking the maximum manufacturing cost per unit. You have to deduct design and end life cost from 7 as well. It will be 7-0.4-1.2-0.6=4.8.
Z
zaahid·
Hi John,
for question C, manufacturing costs had a cost per unit of $6 and so why have you used the target cost of $7 to get the total cost?
L
lazyanimal·
"calculate the maximum manufacturing cost per unit that could be allowed if the company is to achieve the required mark-up"
in b) we saw that 6 was not acceptable as manufacturing cost, we need to find the new one.
with a target cost per unit maximum of 7 to be acceptable : 7 * 50 000 = 350 000
V
Vidhi Dhakan·
Same here I also have same doubt. If you came to know why 7$ they use can you plz tell me.
J
John MoffatTutor·
The question makes it clear that the manufacturing cost will change if they spend extra on design.
It asks what the maximum cost per unit could be allowed if they are to achieve the required mark-up of 50% on cost.
I explain the calculation of this in the lecture.
K
kyolbarsova67054·
Lectures are great: short, but very clear and informative.
Thank you very much for your time and effort.
J
John MoffatTutor·
Thank you for your comment :-)
F
foul·
Hello John,
So in the previous video of target costing lecture 1. in the example you used the formula (25/125)*50 where 25 represents the mark-up. but in this video instead of using the same formula you used (100/150)*10.5 in which the 100 represents the cost. And so I would like to know which to use.
And thank you for making these videos they are a big help.
J
John MoffatTutor·
But it is the same arithmetic except that in the first case we want to know what the mark up was whereas in the second case we want to know what the cost is!!!
Had we want to know the cost in the first example we would have multiplied by 100/125
F
foul·
thank you for the clarification, and the swift reply.
S
santina96·
Good evening sir. I think I worked this out the long way but I arrived at the same answer.
What I did intially is
=>$390,000+$20,000
= $410,000÷50,000
=8.2
Then $8.20- $7.00 = $1.20
? $1.20 * 50,000
=$60,000
Which I then subtracted from the $300,000.
But overall I love your method more.
Thank you..
J
John MoffatTutor·
What matter is ending up with the right answer - the method you use does not matter :-)
Z
zaahid·
Good day,
can you please explain how you got $300,000 for your method.
Thank you in advance
J
John MoffatTutor·
Over the 5 years they sell a total of 50,000 units (4 years of 12,000, plus 1 year of 2,000). The manufacturing cost is $6 per unit, so the total cost is 50,000 x $6 = $300,000.
E
Elena·
Thank you very much dear Tutor. And thank you very much for your resourse.
J
John MoffatTutor·
Thank you for your comment :-)
J
John MoffatTutor·
mami9561: You are welcome, and thank you for your comment :-)
M
mami9561·
Thanks a lot Mr. Moffat for your explanation and it's much appreciated..
J
joana·
Hello John.
Firs of all thanks for your lectures.
In this exercise I don't understand c point why extra in manufacturing is 20000.
Thanks
J
John MoffatTutor·
If I understand your question correctly, it is because the question says that they would have to spend and extra $20,000 on design.
(I assume that you have downloaded the free lecture notes that are needed for the lectures)
A
Aman·
Gaah ! I wish I found out about opentuition earlier! I don't know why employers keep you guys a secret, much better than in class courses!
J
John MoffatTutor·
Maybe employers fo not know about us - please do tell people :-)
Total lifecycle costs ; Design 80,000 + End life costs 30,000 + Manufacturing cost per unit * 50000 = x (X means Total lifecycle cost)
X divide by 50,000 = $7 ($7 is the Required Lifecycle cost per unit which removes the Cost gap of 0.8).
Now I want to calculate Total lifecycle costs as Units * Lifecycle cost per unit ( 50,000 units * $7 : $350,000 )
this amount ($350,000) consists of 80,000 of Design, 30,000 of end life costs and $240,000 of manufacturing costs. I calculated the $240,000 using balancing figure.
Manufacturing cost per unit : $240,000 divide by 50,000 units = $4.8 per unit.
just basics we cant change fixed cost so have to work on our variable costs to reduce cost.
Just a short note to thank you for all your lectures (I am currently revising FM and PM to prepare after an 8 year working hiatus for my SBL) and I greatly enjoyed (and still do) your videos. and so much respect for your patience and diligence to answering questions in the comment section (though I believe there is the Ask The Tutor forum for this ;) )
regards,
Razin
When calculating the lifecycle cost, do we include only relevant costs or all costs for example depreciation and R&D cost already incurred?
but now you have done target cost= 100/150*10.50=7, i dont understand this
why we cant do like first we get profit and subtract from selling price.....
In this example the profit is given as a % of the cost. So for every $100 of cost, the profit is $50 and therefore the selling price would be $150.
Putting it the other way round, for every $150 selling price the cost is $100. Therefore if the selling price is $10.50 the cost must be 100/150 x $10.50 = $7.
(And, of course, it checks. If the selling price is 10.50 and the cost is 7 then the profit is 3.50, which is 50% of the cost)
As if the estimated cost is more than the target cost, the difference is called Cost Gap. What if the target cost is greater than estimated cost, would the difference still be called the Cost Gap?
I get the selling price is $10.50
step 2? required profit
step 3 target cost $7
without the short cut example in video please.
Thank you very much for your time and effort these informative lectures were the reason to select ACCA rather than CPA.
Thank you sir thank you so much
In part C) I calculated it using your method but also tried another method that didn't work and I was hoping you could possibly spot the error.
I took the increase of 20,000 and divided by the number of units produced. Giving 20,000/50,000 = 0.4. This should equate to the increase in cost per unit. Thus to compensate you take the 0.4 from 7 to give $6.6 pu. However it is clearly wrong. Why is this?
thanks
for question C, manufacturing costs had a cost per unit of $6 and so why have you used the target cost of $7 to get the total cost?
in b) we saw that 6 was not acceptable as manufacturing cost, we need to find the new one.
with a target cost per unit maximum of 7 to be acceptable : 7 * 50 000 = 350 000
It asks what the maximum cost per unit could be allowed if they are to achieve the required mark-up of 50% on cost.
I explain the calculation of this in the lecture.
Thank you very much for your time and effort.
So in the previous video of target costing lecture 1. in the example you used the formula (25/125)*50 where 25 represents the mark-up. but in this video instead of using the same formula you used (100/150)*10.5 in which the 100 represents the cost. And so I would like to know which to use.
And thank you for making these videos they are a big help.
Had we want to know the cost in the first example we would have multiplied by 100/125
What I did intially is
=>$390,000+$20,000
= $410,000÷50,000
=8.2
Then $8.20- $7.00 = $1.20
? $1.20 * 50,000
=$60,000
Which I then subtracted from the $300,000.
But overall I love your method more.
Thank you..
can you please explain how you got $300,000 for your method.
Thank you in advance
Firs of all thanks for your lectures.
In this exercise I don't understand c point why extra in manufacturing is 20000.
Thanks
(I assume that you have downloaded the free lecture notes that are needed for the lectures)
And thanks a lot for your comment :-)