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Life cycle costing (part 2) – ACCA Performance Management (PM)

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  1. 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 馃槈 )

    regards,
    Razin

  4. 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…..

    • 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)

      • 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?

  5. 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?

  8. 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.

  9. 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

  10. 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

    • “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

      • 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.

  13. 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.

    • 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

  14. 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梅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..

    • 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)

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