Target costing – Lecture 1 – ACCA Performance Management (PM)
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Component 2 (Wiring) – in an ideal situation 25 cm of wiring is needed for each completed radio. However, there is
some waste involved in the process as wire is occasionally cut to the wrong length or is damaged in the assembly
process. Edward Co estimates that 2% of the purchased wire is lost in the assembly process. Wire costs $0·50 per
metre to buy.
Assembly labour – these are skilled people who are difficult to recruit and retain. Edward Co has more staff of this
type than needed but is prepared to carry this extra cost in return for the security it gives the business. It takes 30 minutes to assemble a radio and the assembly workers are paid $12·60 per hour. It is estimated that 10% ofhours paid to the assembly workers is for idle time.
Can someone help to Calculate Labour per hour and material per unit
Hi, for the reworded example, I understand that you want the profit to work out the target cost, but why do you divide 25 by 125 and then times that by 50?
Thanks 🙂
Because the profit is 25% of the cost. So that is 25/125 of the selling price. (Do go back and have a look at the Paper FA lectures on mark-ups and margins to remind yourself 🙂 )
Thank you! :))
If 1.2 m is total cost. It’s also be target cost
No it isn’t!! Do watch the lecture again 🙂
Hello John,
For total cost of 1,200,000 before divide by 40,000 to get per units, can also be called as “Target Cost”?
Cause the only difference is we divide by expected unit sales?
Hi, I am the same I am confused on the realistic sp $50 and you want profit 25% of cost. I could grasp everything else except this is it can be explained broken down please.
The selling price is the cost plus the profit. If the profit is 25% of the cost then the selling price is 100% + 25% = 125% of the cost.
Dear Mike,
Video ranging between 9:10 to 9:20 completely confused me. First we discussed that the profit is $25 then we did some other calculation and drive the profit of $10. Why we did this… not able to understand completely.
There are 2 techniques to determine profit.
1) From gross selling price
2) From cost
At 9:10 he is explaining the 2) scenario, so we want cost + 25%. Then he is showing us what percentage to use to calculate (25/125 is 1/5 which is 20%), because if we suppose that the cost is 100 (this is not in the task, it is just an assumption) than required profit is 25, so selling price is 125. Therefore we can use the 25/125 logic to our example where the selling price is 50, so as we go back from the selling price to reach the cost we do: 20% * 50 = 10 profit, so cost is 50-10=40.
hope this clarifies.
i cant understand
rajcika1995 is quite correct.
(But who is Mike? Nobody called Mike has ever had anything at all to do with our Paper PM lectures 🙂 )
His name be John, not mike. Soon Sir John Moffat if my petition reaches 100k signatures. So far we are on 3 signatures
In the 2nd example , When we are working out the target cost, do we go with the assumption that the work to make the product goes on for a number of years as we have not factored in the cost of Building and Equipment into the workings ?
$5,000,000 / 40,000 units is a building and equipment cost of $125 .. If production does not therefore last more than 1 year , this product therefore wouldn’t be cost efficient ?
Or are we working on the assumption that the business has the building and equipment for other production already?
Because the question says that the sales are 40,000 units per year, we are effectively assuming that they last indefinitely (as we always do with ROI just as in Paper MA).
Even if they were not lasting indefinitely it would be wrong to say that it would not be cost efficient on your workings because if it only lasted for one year there would be sale proceeds from the building and equipment at the end of the year.
in example 2, what is the assumption that the 30% of 5M is the profit objective when the problem did not say so?
But the question does say so!! It says that a return on investment of 30% is required.
Thank you.
You are welcome 🙂
therefore for every 100 of cost the Selling price is 125, i.e, 100/125*50=$40
and therefore target cost is $50-$40 = $10
is that correct?
I don’t know which example you are referring to. However on your figures, if they want a mark-up of 25% on cost and if the selling price is $50, then the target cost is $40 (not $10. $10 is the profit they want to make).
Please sir I NEED TO KNOW HOW TO SOLVE THIS QUESTION
the selling price of product ZIGMA is set to be $250 for each unit and sales for the coming year are expected to be 500 units if the company requires a return of 15%in the coming year on its investment of $250000in product ZIGMA the target cost for the coming year is
how do i proceed with this question
the choices are
145
155
165
175
Targeted revenue is 500 x $250 = $125000
The required ROI 15% from $ 250000 is $37500
Targeted cost is $125000-$37500 = $87500
Targeted cost per unit = $87500/500 units
= $175
Hi John,
In Target Costing, you gave example of calculating TC when profit was 25% of/on Cost and you calculated by 25/125*50= $10.
Why here we are calculating by 100/150*10.5 = $7 ?
Why not same as 50/150 * 10.50 = $3.5 TC ?
Thanks
You can also say,
TC= (125/100 )x = 50
TC= (100/125)50 = 40
Why would we divide 50 by 150?
The $50 is the realistic selling price. This is equal to cost + profit.
We are told the profit we want is based on the cost.
So we take the cost x as 100% and the profit as 25% this will give you the selling price at 125% x.
We know this is $50 dollars so to get x we divide by 125/100
You could also have this as an equation.
1x + .25x = 50
1.25x = 50
x = 50/1.25
x=40
It’s very helpful, thank you.
You are welcome 🙂
thank you
You are welcome 🙂
whts is the easiest way to understand maxmin, Maximin. and Minimax
I do not understand why you have posted this as a comment on a lecture on target costing!!
Maximin etc. are all explained in my free lectures on risk and uncertainty.
No, no – it is nothing like cost plus pricing!!
With cost plus pricing we start with the cost and add on a % to get the selling price. But there is then no incentive to reduce costs.
With target costing we start with a realistic selling price and then decide what the maximum cost has to be to be able to get the desired profit.
Thank you John. Based on your presentation target costing is effectively the same as conventional cost plus pricing. Why the target cost is always calculated on a per unit basis according to your explanation?