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.

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.

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.

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.

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 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.

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??

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 🙂

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)

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.)

afzalr21 says

Wow, scored 100%

ashfaq1990 says

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

John Moffat says

You are welcome 🙂

sachini1995 says

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.

John Moffat says

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.

mohamed93 says

How about this answer gor question 5

520×20%=104

104+520=624

520÷624×600=500

520-500=20

alie2018 says

Thanks for these questions. Am grateful

mahfuzana says

Q2 :profit was divided by 1000 but i think it would be 1000*12..

John Moffat says

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 🙂

dalvi97 says

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?

John Moffat says

Both statements are correct 🙂

wajinow says

Hello dear?

With reference to Qn.2 (second alternative), how can we calculate the estimated cost of production (if it is required)?

John Moffat says

How could you possibly be asked to calculate the estimated production cost when no information about it is given in the question?!!!!

wajinow says

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.

John Moffat says

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?

wajinow says

Yes. I understood it.Thank you sir!

John Moffat says

You are welcome 🙂

jeremiah1324 says

??

subin7 says

Great work sir… well though out MCQs.

John Moffat says

Thank you 🙂

raheelislam says

target cost is the max cost we can incur on product to get our desired profit..is it the right definition?

John Moffat says

Correct 🙂

pv89 says

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

John Moffat says

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 🙂

Bhavatarini says

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.

John Moffat says

🙂

annayao says

Sorry, could you explain that why there is 100/120?

John Moffat says

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.

annayao says

Thank you so much

John Moffat says

You are welcome 🙂

ikenna24 says

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.

John Moffat says

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.

wanyama says

thanks this is so helpful

baig3292 says

great work here.

Thanks Sir.

John Moffat says

You are welcome 🙂

Samuel Koroma says

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.

John Moffat says

And that is all covered in detail in the free lectures!

mujahidaslam says

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??

moniq789 says

Hello,

the given answer is for cost gap 🙂

moniq789 says

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.

John Moffat says

Monique is correct (and the answer is correct!)

levanrich says

Isn’t this 250 the actual production cost per unit and the 50 is the cost gap?

John Moffat says

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.

sukhdebacca says

250 is required profit, so 300-250 = target cost,

John Moffat says

Agreed – and $50 is the answer given to the test question.

tola2016 says

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

tola2016 says

I finally understand no worries

John Moffat says

I am pleased that you now understand it 🙂

veverica1983 says

Hello,

can you please explain question 5, actual cost calculation?

Thank you in advance,

John Moffat says

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)

veverica1983 says

Thank you!

nicholsonjenna says

Following on from this, just to check: if the mark-up was, say, 30% instead, would the calculation then be 100/130 x $600?

John Moffat says

Correct

ikenna24 says

the average student would assume that $520 was the “cost” in this particular question. the examiner failed to communicate the question properly.

abi01 says

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

John Moffat says

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.)

abi01 says

I got the answer sir.

I was confused about the mark-up.

I got it..thank you for the lectures.

John Moffat says

You are welcome 🙂

Steven says

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

Michael says

I reckon your’e right

Natalia says

Yes, I also got the same answer!

Please advice!

THank you.

John Moffat says

You are correct – the answer should be $50.

Thanks for letting me know. I will have it corrected immediately 🙂

Thit says

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

John Moffat says

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 🙂 )