PM Chapter 2 Questions Target costing
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Wow, scored 100%
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
You are welcome 🙂
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.
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.
How about this answer gor question 5
520×20%=104
104+520=624
520÷624×600=500
520-500=20
Thanks for these questions. Am grateful
Q2 :profit was divided by 1000 but i think it would be 1000*12..
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 🙂
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?
Both statements are correct 🙂
Hello dear?
With reference to Qn.2 (second alternative), how can we calculate the estimated cost of production (if it is required)?
How could you possibly be asked to calculate the estimated production cost when no information about it is given in the question?!!!!
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.
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?
Yes. I understood it.Thank you sir!
You are welcome 🙂
??
Great work sir… well though out MCQs.
Thank you 🙂
target cost is the max cost we can incur on product to get our desired profit..is it the right definition?
Correct 🙂
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
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 🙂
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.
🙂
Sorry, could you explain that why there is 100/120?
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.
Thank you so much
You are welcome 🙂
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.
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.
thanks this is so helpful
great work here.
Thanks Sir.
You are welcome 🙂
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.
And that is all covered in detail in the free lectures!
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??
Hello,
the given answer is for cost gap 🙂
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 🙂
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.
Monique is correct (and the answer is correct!)
Isn’t this 250 the actual production cost per unit and the 50 is the cost gap?
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.
250 is required profit, so 300-250 = target cost,
Agreed – and $50 is the answer given to the test question.
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
I finally understand no worries
I am pleased that you now understand it 🙂
Hello,
can you please explain question 5, actual cost calculation?
Thank you in advance,
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)
Thank you!
Following on from this, just to check: if the mark-up was, say, 30% instead, would the calculation then be 100/130 x $600?
Correct
the average student would assume that $520 was the “cost” in this particular question. the examiner failed to communicate the question properly.
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
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 = $20.
(If you have not already watched it, then do watch the free lecture on target costing. Our lectures are a complete course for Paper F5 and cover everything you need to be able to pass the exam well.)
I got the answer sir.
I was confused about the mark-up.
I got it..thank you for the lectures.
You are welcome 🙂
Sir I think there is a mistake in question 4 answer:
My working is this: SR = 1000*300 = 300,000
Less roi (20%*1250k)=25000
Maximum cost = 50,000$ / 1000 = 50$ p.u not 250
kindly advise
I reckon your’e right
Yes, I also got the same answer!
Please advice!
THank you.
You are correct – the answer should be $50.
Thanks for letting me know. I will have it corrected immediately 🙂
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
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 🙂 )