i got 100% on the first attempt .i have improved so much from Activity Based Costing
J
Jimoh·
Mark up is on Cost
SP $600
Cost X
Mark - up (20% of X)
Mathematically
SP-Cost = Mark-up
600-x = 20% * X
{600-X}=20X/100
{600-X} = X/5
By cross multiplication
5{600-X} = X
3000-5X = X
Collect like terms
3000 = X+5X
6X = 3000
Divide both side by 6
X = $500
Target Cost is $500
S
Sibonisile Lukhele·
Perfect explanation. Thank you
A
aa·
I cant grasp why in question 5 we did do a* 100/120 whereas in similar scenario we did only multiply selling price by profit markup?
J
John MoffatTutor·
It depends whether you are told the mark-up which is the profit as a % of the cost (unless the question specifically says different) or the margin (which is the profit as a % of selling price (unless again the question specifically says different).
If you have forgotten the difference between the two then do look back at the Paper FA lecture on mark-ups and margins.
A
aa·
Thanks Sir
M
Muhammad·
In Question no 5:
Selling price per unit = $600
Expected sales volume = 5,000 units
Mark-up percentage = 20% of cost
Expected production cost per unit = $520
Target cost gap = Target cost - Expected production cost
= $496 - $520
= -$24
So, the target cost gap is $24 per unit.
Why $24 is not the target cost gap? Please clear my confusion.
J
John MoffatTutor·
Given that the selling price has been set at $600, if they are to achieve a mark-up of 20% of cost then they need the cost to be 100/120 x $600 = $500.
If they can get the cost down to $500 then they will get a mark-up of $100 which is 20% of cost. So $500 is the target cost that they are aiming for.
At the moment they expect the cost to be $520 (and at that cost they will not be making a mark-up of 20% given that the selling price is set at $600). So the need to find ways of reducing the cost by $20 does to $500, and this $20 is the cost gap.
Please do watch my free lectures on target costing.
K
Kriszta·
Hi Muhammad,
you took the markup of the expected cost, $520. But in fact you have to calculate the markup of the target cost.
Selling price = target cost + 20% markup
600 = x + 0.2x
600 = 1.2x
600/1.2 = x
500 = x
$500 is your target cost. $520 is the expected cost. The cost gap is $20.
J
John·
60% on first attempt need to do more work
O
Oreoluwa·
I do not understand how you arrived at 100 in question 5. Please, can you explain better?
J
John MoffatTutor·
Use any figure you like - 100 is a good one to choose because it makes the numbers easier.
For every $100 cost, the mark-up is $20 and therefore the selling price is $120.
So for every $120 selling price, the cost is $100.
So if the selling price is $600 then the cost is 100/120 x $600.
(This part of the question is revision from Paper FA :-) )
A
aa·
Sir in previous question we just multiplied selling price with profit markup why could we not do the same here?
R
Rutendo·
on question 2, how did we get 50 isn't it that we are looking for target cost?
J
John MoffatTutor·
Yes we are, and $50 is the target cost.
The required profit is 20% x $1,250,000 = $250,000. This is 250,000/1,000 = $250 per unit.
Given a selling price of 300, then in order for them to achieve a profit of 250, the cost has to be 300 - 250 = $50.
R
Rutendo·
Oooooh i see, had made an error. Didn't read well the question.
J
John MoffatTutor·
I am pleased that you are now clear about it.
S
Simbarashe·
Scored 100%
C
chukwudi·
I need clarity on question 5 I must be missing something could you explain it to me
J
John MoffatTutor·
The selling price is to be $600 per unit. In order to achieve a mark-up of 20% of the cost, it means that the cost will have to be 100/120 x $600 = $500. So $500 is the target cost.
The expected cost is $520, which is $20 more than the target of $500, and so the cost gap is the difference of $20 (and this is how much they need to reduce the production cost by as is explained in my free lectures on target costing).
T
Taiwo·
100% on first attempt.
Z
Zunaib Khan·
i got 100% in 1st attempt. awesome
R
Ray·
I still cant grasp question 5, why did we use ((100/120)*600)
J
John MoffatTutor·
The mark-up is 20% of cost. So for every $100 cost they add on $20 and the selling price is $120.
Therefore the cost is $100 for every $120 of selling price. So for a selling price of $600 they need the cost to be 100/120 x $600.
D
David·
100% first attempt
R
Rahul·
100% in first attempt
M
Mavis·
Hi John, I am still confused at q5. It is the only one I have gotten wrong. I can't seem to understand how you have gotten $20.
J
John MoffatTutor·
The cost gap is the difference between the expected cost (520) and the target cost (100/120 x 600).
S
SHAMSHAD·
Hi,
There are two types of percentage of profit: 1) 20% of Sales, (2) 20% on Cost. In this question you have to find out how much is on sales because cost is not given in the question, instead we have to arrive at the Target Cost. Therefore, it will be 16.67% of sales.
Concept:
Let Cost be 100 cost price
Add: 20% 20
It becomes= 120= selling price
Therefore, if sale price is 120 than cost is 100, what if sale price is 100? = 100x100/120=16.67%, means 16.67% of sales.
I got the same answer, would my calculations be OK for the exam?
Thanks,
Tahsina
J
John MoffatTutor·
Yes. (and nobody looks at your workings anyway for the section A and B questions :-) )
F
Federico·
Hi Tahsina,
You are right but a small suggestion to save your time:
Being a mark up 20%. It means:
Selling 120%
Cost 100%
Profit 20%
So simply do: 100/120 * 600= 500
Then 520-500= 20
Ciao! :)
L
luzango·
Thank you John I got 100%
J
John MoffatTutor·
Great :-)
L
Lin·
Dear John, i still have some confuse about the Q2, why we can not 300*1.2=250?
So if I do this, does that mean that 250 is the rate of return that it expects to get?
J
John MoffatTutor·
250 is certainly not a rate of return (rates of returns are %'ages!).
They require a return on investment of 20% and therefore they want a profit of 20% x $1,250,000.
What you are doing would be correct if they wanted a profit on cost (i.e. a profit margin) of 20%.
It would seem you did not watch my free lectures before attempting the test because this example is similar to example 2 in my lecture.
O
omavictor·
Thanks John. I sincerely appreciate.
J
John MoffatTutor·
Thank you for your comment :-)
A
Adamu·
Thanks John, your explanation was explicit as I scored 100% on the MCQ test.
N
Natalie·
I got full in this quiz, thanks to John's very thorough interpretations. :)
J
John MoffatTutor·
Well done :-)
O
otema2017·
Its all good for me on this chapter
H
Hermela·
thank you Mr. I get 100%... it was really very clear and digestible lecture
R
renelle·
I was very confused about the 100. Still a little unsure
J
John MoffatTutor·
Which question are you referring to?
If it is Question 5, since the profit is 20% of the cost the selling price must be 100% + 20% = 120% of the cost.
Therefore the target cost must be 600/120% = $500.
N
Nikuze Mukundenkase·
thank you so much lecture for the test
J
John MoffatTutor·
You are welcome.
M
MELISSA·
It took my brain a while to figure out that reverse mathematical operation! I was only convinced when I realized that 20% of 500 (the unknown cost price) is 100 and when added gives us that 600 sale price. Defeated by math...
Posted for anyone else coming here to figure it out.
D
David·
For sure. I think the vocabulary is just as important!
E
Esther·
Thanks for the lecture and the questions
T
Tlotlisang·
Oh yeah! ?%
P
PAUL·
This was perfect am probably progressing i got 100%.despite being average in chapt.1 Thank you Open tuition.
Y
yakeshia u·
Hi, I’m confused by question 5..
Is it possible you can do a breakdown?
J
John MoffatTutor·
The selling price is $600.
For the profit to be 20% of the cost, the cost needs to be 100/120 x $600 = $500, and this is therefore the target cost.
The estimated cost is actually $520, and therefore the cost gap is 520 - 500 = $20.
B
Bukar·
I hope am making a progress
A
ANIS·
Thank youu for the quiz . I got 8% . My mistake at Q5 , i think the markup is markup cost ??
J
John MoffatTutor·
The mark-up is the profit as a % of the cost.
A
adela·
so the cost is 520 per unit, not 600. That is my understanding too
J
John MoffatTutor·
The target cost is the cost for which they will get a mark up of 20% if the selling price is $600.
The target cost is not the actual production cost - it is the cost they need to achieve in order to end up with a markup of 20%.
L
Liya·
Hy Sir,
Can I do the 5th question in this way?
20% on cost. So cost+profit= sp
100 + 20 = 120 (assume cost as 100)
.
. . 20/120*600 = $100
600-100 = $500
Gap= 520-500 = $20
J
John MoffatTutor·
Of course. It doesn't matter how you do your workings.
L
Liya·
Okay Sir. Thank you.
W
Wasay·
Hey in Question 5, why are we clculating target cost by using the selling price when in the question it states that required mark up is 20% of cost and not selling price?
J
John MoffatTutor·
The target cost is calculated from the selling price so as to give a mark-up of 20% on cost.
So the target cost is 100/120 x 600 = 500.
The actual cost is only relevant afterwards in order to compare with the target cost so as to arrive at the cost gap.
Did you watch the lecture before attempting the test?
T
Tejas·
Hi John,
In Q5, Why cant we simply multiply 20% with $520 to get our profit figure and subtract it with the selling price to get the target cost?
J
John MoffatTutor·
That would be a meaningless exercise. The whole point of calculating the target cost is that we would then look for ways of reducing the production cost down to the target i.e. reducing the cost gap to zero.
Did you watch the free lectures before attempting this test?
N
Naledi·
Hi sir,i was trying to open the quick quiz but its refusing,its jus showing a black screen.I want to attempt to the quick quiz but its failing to open
O
opentuition_teamAdmin·
Please try another browser like chrome or edge or safari
K
kissme4560·
I scored 100% thank you for the questions
K
kissme4560·
Sir please I want to ask if this working is correct even thou I arrived with the same answer.
SP = 600
And the required profit margin is 20% on cost . THIS MEANS that : COST + 20%
Where 20% = 0.2 therefore
In other to get SELLING PRICE this should be COST it self which is 100% + mark-up cost which is 20%
Therefore SP=cost x 120% and by finding the cost, Make COST the subject thin will become
COST = SP/ 120%
= 600/120%
= 500
Cost Gap = 520 - 500
= 20
J
John MoffatTutor·
Yes - they are the same workings as the answer :-)
K
kissme4560·
Ok sir Thanks to You
L
Leslie·
Hello, Sir please is the below correct?
Seems figures are not matching but landed correct answer somehow
SP= 600
Cost= 20%
600x20% = $120
Profit is 20/120 x 600 = 100
Cost gap is 120-100= $20
J
John MoffatTutor·
The fact it matches is a complete coincidence because your figures to not make sense.
The required mark-up is 20% of cost. Therefore the target cost to achieve this mark-up is 100/120 x 600 = 500.
The expected actual cost is 520.
Therefore the cost gap is 520 - 500 = 20.
A
angana·
100 % . Thank you for the lectures. A great initiative for people like us who cannot afford expensive classes.
J
jamshid265·
Got 100%
Thank you for the lectures
J
John MoffatTutor·
Thank you for your comment :-)
C
Chandni·
100%
M
MMA·
100%:)
J
John MoffatTutor·
Great :-)
(But do make sure that you buy a Revision Kit from one of the ACCA approved publishers. Our tests are just meant to be quick checks after each chapter, but it is vital that you practice lots and lots of exam standard questions. The Revision Kits are full of both past exam and other exam standard questions in the various formats that they are asked in the exam.)
S
singeley·
thank you, I have scored 100%, you are so clear and understanding in your lectures, keep the good work up.
K
karinegukaa·
100%. thanks for the lectures.
J
John MoffatTutor·
Thank you for your comment :-)
A
Andy·
100%.. :)
A
arusyak·
I think there is a mistake in one of the questions. The question says to calculate the target cost, but in the answer it is calculated the target cost gap by 300-250=50. Is 50 the target cost? I don't think so. It is the question about 1.250.000 investment
J
John MoffatTutor·
The answer is correct. The selling price is $300 and the required profit is $250.
Therefore the target cost in order to achieve that profit is 300 - 250 = $50.
C
Carlos·
I actually agree with you. It should be reworded and ask to calculate the target cost gap
T
tasya999·
true,but if you look at the option,it is logical to think that we were asked to find cost gap. just a cliche trick in exam
T
tasya999·
i just read the comments below and actually they really asked us to find target cost ,not target cost gap. you may think to work on it again. As the target cost will be the difference between actual cost and target cost. but in this question and workings, it showed us on how to find a target cost. Correct me if im wrong john
J
John MoffatTutor·
The target cost is not the difference between the actual cost and the target cost. The difference is the cost gap. The question specifically asks for the target cost - it is worded correctly and the answer is correct.
A
ali·
100%
J
John MoffatTutor·
Very good :-)
(But do make sure you have a Revision Kit from one of the ACCA approved publishers, because they have many more questions for you to practice on :-) )
S
Shwetal·
The lectures are really helpful. Thank you
J
John MoffatTutor·
Thank you for your comment :-)
U
Urmil·
hey john, just got 100%, you have made such concepts really very easy for me, just want to ask if i want to practice more this topics bpp exam kit is enough?
J
John MoffatTutor·
Yes, it is enough. You need to work through all the questions in the Revision Kit :-)
V
vrehal·
can you please tell me which publishers revision kit can i buy for pm?
J
John MoffatTutor·
Best is to buy from one of the ACCA Approved Publishers - they are BPP and Kaplan. (You will find a link on other pages of this website that will give you a 20% discount on BPP books)
T
tumelofaith·
Good Day.
I have attempted and finished the 1st set of questions, but cannot seem to be able to move on to the next set of questions.
Could there possibly be a technical problem going on?
J
John MoffatTutor·
If you mean the questions on this page (testing on the lectures for chapter 2 of the notes), then the test is working fine.
T
tumelofaith·
So is just these 5 questions that need to be done?
J
John MoffatTutor·
As explained in the introductory lecture for Paper PM, there is a short test to try for each chapter in our free lecture notes. However you need to practice far more question and should therefore buy a Revision Kit from one of the ACCA approved publishers.
M
maganok·
Got 100% baby!
Thank You so much, I'm actually enjoying the notes, lecture videos and the practical quiz.
J
John MoffatTutor·
Great :-)
T
tom1991·
Thanks for this valuable quiz. I got 8% of total score I failed to answer Q5
J
jonah·
SP=cost + profit(P)...…(i)
let cost be X……(ii)
from the qn. profit is 20%of cost
so P=20%X……(iii)
then put (ii) & (iii) into (i)
Note SP=600 from the question
thus 600=X+20%X. find X
X=$520
so the diff btn $520 & $500 is the gap
A
afzal·
Wow, scored 100%
A
ashfaq1990·
Thanks. I got 80 points. I failed to answer properly in Q5.So I just read the comments section and understand my fault. Thank you again
J
John MoffatTutor·
You are welcome :-)
S
Sachini Kaushalya·
Hi,
I have a contradiction between Q1 and Q5. Both the questions are the same but they follow different approaches.
In Q1 it takes (450*20% = 90) which makes the cost as 360. and in Q5 it takes (600/120*100=500). 500 to be the cost.
J
John MoffatTutor·
There is no contradiction. In question 1 it says that the profit is 20% of selling price, whereas in question 5 is it 20% of cost.
M
Mohamed·
How about this answer gor question 5
520×20%=104
104+520=624
520÷624×600=500
520-500=20
A
alie2018·
Thanks for these questions. Am grateful
M
mahfuzana·
Q2 :profit was divided by 1000 but i think it would be 1000*12..
J
John MoffatTutor·
No. Why do you want to divide by 12? The required return is 20% per annum, and so is for the year. The sales are 1,000 units per year.
There would be no logic at all in dividing anything by 12 :-)
S
Suaad·
A target cost gap ONLY arises when estimated (what may be the actual) cost is more than the target (to be achieved) cost, right?
If it is the other way around, there is no target cost and we could conclude that we will achieve our target profit or even more?
J
John MoffatTutor·
Both statements are correct :-)
W
wolde·
Hello dear?
With reference to Qn.2 (second alternative), how can we calculate the estimated cost of production (if it is required)?
J
John MoffatTutor·
How could you possibly be asked to calculate the estimated production cost when no information about it is given in the question?!!!!
W
wolde·
I think the information on the three componets of cost(Direct material,direct labour and production overhead) must be given in order to calculate estimated cost of production.
J
John MoffatTutor·
Yes - you would need to be given details of the costs involved. Have you watched my free lectures on target costing and on lifecycle costing?
W
wolde·
Yes. I understood it.Thank you sir!
J
John MoffatTutor·
You are welcome :-)
J
jeremiah1324·
??
S
Subin·
Great work sir... well though out MCQs.
J
John MoffatTutor·
Thank you :-)
R
raheelislam·
target cost is the max cost we can incur on product to get our desired profit..is it the right definition?
J
John MoffatTutor·
Correct :-)
P
pv·
Hello Sir,
As per information provided question 4, the target Selling price(SP) is $20, the target profit margin is 30% and the est prodn cost is $16.
In the question, it is not given - if the margin % is on cost or on SP, but the solution is done taking the margin % on SP.
In the absence of any information as highlighted above, is it safe to consider the Margin % on SP?
Request your inputs on the same
thanks and wish you a merry xmas and happy new year
J
John MoffatTutor·
Unless the question says differently, profit margin is always a % of selling price, and mark-up is always a % of cost.
And best wishes to you also for the season :-)
B
Bhavatarini·
Number 5 was a nice tricky question. I like the fact that you've put a question of this nature here in order to make us aware that in the exams we will get a question that will require the calculation of the cost using a markup rather than a margin.
J
John MoffatTutor·
:-)
A
annayao·
Sorry, could you explain that why there is 100/120?
J
John MoffatTutor·
Because there is a mark up of 20%. So for every 100 cost, the profit is 20 and the selling price is therefore 120.
So for every 120 selling price the cost is 100.
It will help you to watch the Paper F3 lecture on mark-ups and margins.
A
annayao·
Thank you so much
J
John MoffatTutor·
You are welcome :-)
I
Ikenna·
I kinda disagree with your explanation of question 5. the question wasn't properly structured! the question said "markup on cost" and they ended up calculating the markup on sales price...which is 600. examiners must be very clear and explicit when setting questions as the 1st step in passing an examination is the student's ability to understand the question.
in this particular scenario, the answer to that question is debatable as the examiner has failed to communicate his question clearly.
J
John MoffatTutor·
Sorry but you are wrong. The question is completely properly structured and the examiner has communicated the question perfectly. The answer has certainly not calculated a mark-up on selling price - that would be ridiculous given that mark-ups are always calculated on cost!
I think that maybe you do not understand target costing, and I do suggest that you watch my free lecture. The target cost is calculated from the selling price.
The mark up is 20% of cost, and therefore for every $100 cost, there is profit of $20 and the selling price is $120.
Or, putting it the other way round, for every $120 selling price, the cost is $100.
Here, the selling price is $600, and therefore the target cost is 100/120 x $600 = $500
(Which checks – if the cost were 500, then the profit would be 20% x 500 = 100, giving a selling price of $600)
You are correct is saying that the first step is the ability to understand the question. It seems that you have not understood it, but that is not the fault of the question. This is a very common question in the exam.
W
wanyama·
thanks this is so helpful
B
baig3292·
great work here.
Thanks Sir.
J
John MoffatTutor·
You are welcome :-)
A
Ansu Koroma·
Thanks for the MCQs. The questions were very simple and straight forward. For the calculation aspect I recommend that students grasp the formula for target cost and the target cost gap. An understanding of the steps used in deriving a target cost is important.
J
John MoffatTutor·
And that is all covered in detail in the free lectures!
M
muujahid·
good evening sir in question 2 you are asking for the target cost per unit which in my knowledge is 250 but the answer here is 5 which is the cost gap can you please explain this??
M
Moniq·
Hello,
the given answer is for cost gap :)
M
Moniq·
Hi again, is`s a pitty - I can`t edit the comment! but the given answer is correct, this is not cost gap but target cost, as per comment below (and explanations :)
We don`t know the actual production cost, therefore we are not able to calculate cost gap.
J
John MoffatTutor·
Monique is correct (and the answer is correct!)
L
Levan·
Isn't this 250 the actual production cost per unit and the 50 is the cost gap?
J
John MoffatTutor·
No - 50 is NOT the cost gap!
250 is not the actual production cost. It is the required profit and therefore 50 is the target cost.
See the answer that appears on the screen, and read Monique's comment above.
S
Sukhdeb·
250 is required profit, so 300-250 = target cost,
J
John MoffatTutor·
Agreed - and $50 is the answer given to the test question.
T
tola2016·
In regards to question 5 how does the 100 come about and does mark-up always involve 100 as in the lecture the mark-up is not spoke about
T
tola2016·
I finally understand no worries
J
John MoffatTutor·
I am pleased that you now understand it :-)
D
Dragana·
Hello,
can you please explain question 5, actual cost calculation?
Thank you in advance,
J
John MoffatTutor·
The mark up is 20% of cost, and therefore for every $100 cost, there is profit of $20 and the selling price is $120.
Or, putting it the other way round, for every $120 selling price, the cost is $100.
Here, the selling price is $600, and therefore the target cost is 100/120 x $600 = $500
(Which checks - if the cost were 500, then the profit would be 20% x 500 = 100, giving a selling price of $600)
D
Dragana·
Thank you!
J
Jenna·
Following on from this, just to check: if the mark-up was, say, 30% instead, would the calculation then be 100/130 x $600?
J
John MoffatTutor·
Correct
I
Ikenna·
the average student would assume that $520 was the "cost" in this particular question. the examiner failed to communicate the question properly.
A
abi01·
Hello sir,
I didn't understand the question number 3 where we need to find the target cost gap, where selling price is set at $600,
the company expects to sell 5000 units a month, required mark-up is 20% of cost and expected production cost is $520 per unit.
Kindly explain.
Regards
J
John MoffatTutor·
The selling price is 600, and therefore the target cost is 100/120 x 600 = $500 (so that the profit of 100 is 20% of cost as is required).
Therefore the cost gap is 520 - 500 = $20.
(If you have not already watched it, then do watch the free lecture on target costing. Our lectures are a complete course for Paper F5 and cover everything you need to be able to pass the exam well.)
A
abi01·
I got the answer sir.
I was confused about the mark-up.
I got it..thank you for the lectures.
J
John MoffatTutor·
You are welcome :-)
S
Steven·
Sir I think there is a mistake in question 4 answer:
My working is this: SR = 1000*300 = 300,000
Less roi (20%*1250k)=25000
Maximum cost = 50,000$ / 1000 = 50$ p.u not 250
kindly advise
M
Michael·
I reckon your'e right
N
Natalia·
Yes, I also got the same answer!
Please advice!
THank you.
J
John MoffatTutor·
You are correct - the answer should be $50.
Thanks for letting me know. I will have it corrected immediately :-)
T
Thit·
I think the answer is correct.
My way of thinking is...
Selling Price - 600
Profit Mark up ( 20% based on cost ), So, 600/120 x 100 = 500 (Cost)
Actual Cost - 500
Expected Cost -520
Target cost gap is $ 20
Please advise that my calculation is correct.
Thanks
J
John MoffatTutor·
You are looking at a different question!
(The questions appear at random so the number of the question changes).
Your answer is correct for the question that you are looking at (but it is not the same question as the one being discussed above :-) )
SP $600
Cost X
Mark - up (20% of X)
Mathematically
SP-Cost = Mark-up
600-x = 20% * X
{600-X}=20X/100
{600-X} = X/5
By cross multiplication
5{600-X} = X
3000-5X = X
Collect like terms
3000 = X+5X
6X = 3000
Divide both side by 6
X = $500
Target Cost is $500
If you have forgotten the difference between the two then do look back at the Paper FA lecture on mark-ups and margins.
Selling price per unit = $600
Expected sales volume = 5,000 units
Mark-up percentage = 20% of cost
Expected production cost per unit = $520
Markup = Mark-up percentage * Cost
= 20% * $520
= $104
Target cost = Selling price - Markup
= $600 - $104
= $496
Target cost gap = Target cost - Expected production cost
= $496 - $520
= -$24
So, the target cost gap is $24 per unit.
Why $24 is not the target cost gap? Please clear my confusion.
If they can get the cost down to $500 then they will get a mark-up of $100 which is 20% of cost. So $500 is the target cost that they are aiming for.
At the moment they expect the cost to be $520 (and at that cost they will not be making a mark-up of 20% given that the selling price is set at $600). So the need to find ways of reducing the cost by $20 does to $500, and this $20 is the cost gap.
Please do watch my free lectures on target costing.
you took the markup of the expected cost, $520. But in fact you have to calculate the markup of the target cost.
Selling price = target cost + 20% markup
600 = x + 0.2x
600 = 1.2x
600/1.2 = x
500 = x
$500 is your target cost. $520 is the expected cost. The cost gap is $20.
For every $100 cost, the mark-up is $20 and therefore the selling price is $120.
So for every $120 selling price, the cost is $100.
So if the selling price is $600 then the cost is 100/120 x $600.
(This part of the question is revision from Paper FA :-) )
The required profit is 20% x $1,250,000 = $250,000. This is 250,000/1,000 = $250 per unit.
Given a selling price of 300, then in order for them to achieve a profit of 250, the cost has to be 300 - 250 = $50.
The expected cost is $520, which is $20 more than the target of $500, and so the cost gap is the difference of $20 (and this is how much they need to reduce the production cost by as is explained in my free lectures on target costing).
Therefore the cost is $100 for every $120 of selling price. So for a selling price of $600 they need the cost to be 100/120 x $600.
There are two types of percentage of profit: 1) 20% of Sales, (2) 20% on Cost. In this question you have to find out how much is on sales because cost is not given in the question, instead we have to arrive at the Target Cost. Therefore, it will be 16.67% of sales.
Concept:
Let Cost be 100 cost price
Add: 20% 20
It becomes= 120= selling price
Therefore, if sale price is 120 than cost is 100, what if sale price is 100? = 100x100/120=16.67%, means 16.67% of sales.
For Q5 I did the following calculations:
Sales revenue $600 × 5000 = $3,000,000
Profit required 20/120 × $3,000,000 = $500,000
Total cost $3,000,000 - $500,000 = $2,500,000
Target cost p/unit $2,500,000 / 5000 = $500
Cost gap $520 - $500 = $20
I got the same answer, would my calculations be OK for the exam?
Thanks,
Tahsina
You are right but a small suggestion to save your time:
Being a mark up 20%. It means:
Selling 120%
Cost 100%
Profit 20%
So simply do: 100/120 * 600= 500
Then 520-500= 20
Ciao! :)
So if I do this, does that mean that 250 is the rate of return that it expects to get?
They require a return on investment of 20% and therefore they want a profit of 20% x $1,250,000.
What you are doing would be correct if they wanted a profit on cost (i.e. a profit margin) of 20%.
It would seem you did not watch my free lectures before attempting the test because this example is similar to example 2 in my lecture.
If it is Question 5, since the profit is 20% of the cost the selling price must be 100% + 20% = 120% of the cost.
Therefore the target cost must be 600/120% = $500.
Posted for anyone else coming here to figure it out.
Is it possible you can do a breakdown?
For the profit to be 20% of the cost, the cost needs to be 100/120 x $600 = $500, and this is therefore the target cost.
The estimated cost is actually $520, and therefore the cost gap is 520 - 500 = $20.
The target cost is not the actual production cost - it is the cost they need to achieve in order to end up with a markup of 20%.
Can I do the 5th question in this way?
20% on cost. So cost+profit= sp
100 + 20 = 120 (assume cost as 100)
.
. . 20/120*600 = $100
600-100 = $500
Gap= 520-500 = $20
So the target cost is 100/120 x 600 = 500.
The actual cost is only relevant afterwards in order to compare with the target cost so as to arrive at the cost gap.
Did you watch the lecture before attempting the test?
In Q5, Why cant we simply multiply 20% with $520 to get our profit figure and subtract it with the selling price to get the target cost?
Did you watch the free lectures before attempting this test?
SP = 600
And the required profit margin is 20% on cost . THIS MEANS that : COST + 20%
Where 20% = 0.2 therefore
In other to get SELLING PRICE this should be COST it self which is 100% + mark-up cost which is 20%
Therefore SP=cost x 120% and by finding the cost, Make COST the subject thin will become
COST = SP/ 120%
= 600/120%
= 500
Cost Gap = 520 - 500
= 20
Seems figures are not matching but landed correct answer somehow
SP= 600
Cost= 20%
600x20% = $120
Profit is 20/120 x 600 = 100
Cost gap is 120-100= $20
The required mark-up is 20% of cost. Therefore the target cost to achieve this mark-up is 100/120 x 600 = 500.
The expected actual cost is 520.
Therefore the cost gap is 520 - 500 = 20.
Thank you for the lectures
(But do make sure that you buy a Revision Kit from one of the ACCA approved publishers. Our tests are just meant to be quick checks after each chapter, but it is vital that you practice lots and lots of exam standard questions. The Revision Kits are full of both past exam and other exam standard questions in the various formats that they are asked in the exam.)
Therefore the target cost in order to achieve that profit is 300 - 250 = $50.
(But do make sure you have a Revision Kit from one of the ACCA approved publishers, because they have many more questions for you to practice on :-) )
I have attempted and finished the 1st set of questions, but cannot seem to be able to move on to the next set of questions.
Could there possibly be a technical problem going on?
Thank You so much, I'm actually enjoying the notes, lecture videos and the practical quiz.
let cost be X……(ii)
from the qn. profit is 20%of cost
so P=20%X……(iii)
then put (ii) & (iii) into (i)
Note SP=600 from the question
thus 600=X+20%X. find X
X=$520
so the diff btn $520 & $500 is the gap
I have a contradiction between Q1 and Q5. Both the questions are the same but they follow different approaches.
In Q1 it takes (450*20% = 90) which makes the cost as 360. and in Q5 it takes (600/120*100=500). 500 to be the cost.
520×20%=104
104+520=624
520÷624×600=500
520-500=20
There would be no logic at all in dividing anything by 12 :-)
If it is the other way around, there is no target cost and we could conclude that we will achieve our target profit or even more?
With reference to Qn.2 (second alternative), how can we calculate the estimated cost of production (if it is required)?
As per information provided question 4, the target Selling price(SP) is $20, the target profit margin is 30% and the est prodn cost is $16.
In the question, it is not given - if the margin % is on cost or on SP, but the solution is done taking the margin % on SP.
In the absence of any information as highlighted above, is it safe to consider the Margin % on SP?
Request your inputs on the same
thanks and wish you a merry xmas and happy new year
And best wishes to you also for the season :-)
So for every 120 selling price the cost is 100.
It will help you to watch the Paper F3 lecture on mark-ups and margins.
in this particular scenario, the answer to that question is debatable as the examiner has failed to communicate his question clearly.
I think that maybe you do not understand target costing, and I do suggest that you watch my free lecture. The target cost is calculated from the selling price.
The mark up is 20% of cost, and therefore for every $100 cost, there is profit of $20 and the selling price is $120.
Or, putting it the other way round, for every $120 selling price, the cost is $100.
Here, the selling price is $600, and therefore the target cost is 100/120 x $600 = $500
(Which checks – if the cost were 500, then the profit would be 20% x 500 = 100, giving a selling price of $600)
You are correct is saying that the first step is the ability to understand the question. It seems that you have not understood it, but that is not the fault of the question. This is a very common question in the exam.
Thanks Sir.
the given answer is for cost gap :)
Selling price: 300
Req profit (20%*1 250 000/1000)=250
Target Cost=50 (300- 250)
We don`t know the actual production cost, therefore we are not able to calculate cost gap.
250 is not the actual production cost. It is the required profit and therefore 50 is the target cost.
See the answer that appears on the screen, and read Monique's comment above.
can you please explain question 5, actual cost calculation?
Thank you in advance,
Or, putting it the other way round, for every $120 selling price, the cost is $100.
Here, the selling price is $600, and therefore the target cost is 100/120 x $600 = $500
(Which checks - if the cost were 500, then the profit would be 20% x 500 = 100, giving a selling price of $600)
I didn't understand the question number 3 where we need to find the target cost gap, where selling price is set at $600,
the company expects to sell 5000 units a month, required mark-up is 20% of cost and expected production cost is $520 per unit.
Kindly explain.
Regards
Therefore the cost gap is 520 - 500 = $20.
(If you have not already watched it, then do watch the free lecture on target costing. Our lectures are a complete course for Paper F5 and cover everything you need to be able to pass the exam well.)
I was confused about the mark-up.
I got it..thank you for the lectures.
My working is this: SR = 1000*300 = 300,000
Less roi (20%*1250k)=25000
Maximum cost = 50,000$ / 1000 = 50$ p.u not 250
kindly advise
Please advice!
THank you.
Thanks for letting me know. I will have it corrected immediately :-)
My way of thinking is...
Selling Price - 600
Profit Mark up ( 20% based on cost ), So, 600/120 x 100 = 500 (Cost)
Actual Cost - 500
Expected Cost -520
Target cost gap is $ 20
Please advise that my calculation is correct.
Thanks
(The questions appear at random so the number of the question changes).
Your answer is correct for the question that you are looking at (but it is not the same question as the one being discussed above :-) )