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 )

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?

shakir7385says

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?

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

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

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?

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.

“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.

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

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

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.

RazinZainal says

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

John Moffat says

Thank you for your comment 馃檪

JojoBeat says

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?

John Moffat says

All costs (but not depreciation because including the initial cost of equipment and any sale proceeds is already including that amount).

JojoBeat says

Certain Kaplan questions have excluded opportunity costs & sunk R&D costs. Is there any reason for this?

hermela says

sir, i am really grateful to find this open tuition..but i dont get the concept of end life cost?

John Moffat says

Maybe the production needed special equipment that needs dismantling at the end of the production (and dismantling it costs money).

dharvi says

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…..

John Moffat says

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)

dharvi says

ok, now got it, thank u so much

Bukr says

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?

shakir7385 says

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?

John Moffat says

No. If that is the case then it is just that there is no cost gap 馃檪

grishaparikh says

Thank you so much for the time and effort put into these lectures and notes. We greatly appreciate it.

John Moffat says

Thank you for your comment 馃檪

binidire says

Thank you.

John Moffat says

You are welcome 馃檪

tasnimrxo says

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.

tasnimrxo says

Ignore me I understand now

John Moffat says

I am pleased that you now understand 馃檪

7fsa says

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

John Moffat says

Thank you for your comment 馃檪

adch111 says

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

xiaoyueyue says

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.

muddyzaahid says

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?

lazyanimal says

“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

cadhakan says

Same here I also have same doubt. If you came to know why 7$ they use can you plz tell me.

John Moffat says

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.

kyolbarsova67054 says

Lectures are great: short, but very clear and informative.

Thank you very much for your time and effort.

John Moffat says

Thank you for your comment 馃檪

foul says

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.

John Moffat says

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

foul says

thank you for the clarification, and the swift reply.

santina96 says

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..

John Moffat says

What matter is ending up with the right answer – the method you use does not matter 馃檪

muddyzaahid says

Good day,

can you please explain how you got $300,000 for your method.

Thank you in advance

John Moffat says

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.

elenaakhra says

Thank you very much dear Tutor. And thank you very much for your resourse.

John Moffat says

Thank you for your comment 馃檪

John Moffat says

mami9561: You are welcome, and thank you for your comment 馃檪

mami9561 says

Thanks a lot Mr. Moffat for your explanation and it’s much appreciated..

joanaana says

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

John Moffat says

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)

amankaur says

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!

John Moffat says

Maybe employers fo not know about us – please do tell people 馃檪

And thanks a lot for your comment 馃檪

alie2018 says

Thanks John.

John Moffat says

You are welcome 馃檪