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The use of the target cost – ACCA Performance Management (PM)

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    • The lectures and notes cover everything needed for the exam. However practice on past exam questions is vital. For this you should buy a BPP Revision Kit because it is full of past exam questions and answers (and you can get a 20% discount by clicking on the advert on this website 馃檪 )

  4. At 4:30 you said can we reduce cost without needing to reduce price. Do you mean without needing to increase price because to hypothetically get rid of the cost gap cost needs to go down or price needs to go up right?

    • No. We want to cut costs but still be able to charge customers the same selling price. Cutting some costs might make the product less attractive to customers which could mean charging a lower price, and we don’t want to do that.

  6. Hi sir,
    can you please elaborate a little more on perishability?
    Am I right if I say perishability implies that services cannot be inventoried for future use?
    A further question I want to ask is as you also are providing a service through your vids but here we can store these videos for future use, I mean you don’t need to deliver the videos every time a student requires them so how the concept of perishability applies here?

    • Yes – perishability means they are not stored before deliver to the customer.

      Our videos are not perishable in that as you say they are stored by us. We are not saying that target costing can never be used for service businesses but simply that it is more difficult (and not always possible) because of things like perishability.

    • Learning curves are explained in Chapter 12 of our free lecture notes and the lectures that go with it. They are a separate topic from target costing but questions in the exam can examine more that one topic in the same question.

  13. Hi Sir,

    Just a question on one of the possible ways you have mentioned in the lecture of attempting to close the target cost gap.

    “Re-examine the design of the product”.

    Isn’t it when market research was done to obtain a selling price, a product prototype was already made for the public to view & comment on a price they are willing to buy it for.
    Thus, product specifications should not be adjusted in attempting to close the target cost gap.

    Does your statement of re-examine the design of the product mean the product specifications?

    I’m confused on this matter.

    Thanks.

    • It is extremely unlikely that a prototype will have been shown to the public.

      When the first ever iPhone was created, none of the public had seen it before it went on sale and nor did they know the specifications until it went on sale. Apple decided how much they thought they could realistically charge for it, then decided the maximum that the cost could be in order to make the profit margin that they wanted. They initially were going to have more features (such as a front-facing camera which the first iPhone didn’t have) but they stripped out some features so as to reduce the cost.

  15. Thank you for these lectures John. Does it ever happen that the % profit required is reduced in order to address the cost gap? I’m thinking that it may not always be preferable to redesign or look for cheaper materials. Also, is the profit required generally calculated based on the value of materials/inputs or is it unrelated?

    • They may well decide to go for a lower profit margin, but that is not really the object of the exercise. The intention is always to try and find ways of reducing costs.

      Profit is generally calculated on all production costs.

  16. They start buy determining a realistic selling price by looking, for example, at the competition, and deciding what the most they can expect customers to be prepared to pay.

    They are certainly ‘allowed’ to decide on a higher price, but the danger then is that they might end up with no demand.

  17. Thank you. Closing the cost gap is all about looking for ways to reduce costs but not compromising the quality of the product more so with labour and materials needed for product design and production. John is seems that the target cost is like a standard cost. Is increasing the selling price a viable option to close the cost gap and if not why?

    • I think because the topic is related to cost not profit. Basically, the main aim of target costing is to reduce the cost first and foremost so it will always be the first priority to find measures to reduce cost rather than increase the selling price. Because if you increase the selling price, it’s very unlikely that consumers will pay a higher price for a new product when a similar product is selling at a lower price.

      • You are correct. Certainly, if they are not able to find ways of reducing costs they may consider making a lower profit or increasing the selling price, but for the reasons you state increasing the selling price is unlikely to be a realistic option.

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