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Hi i had a look at the examiner’s answer for BBB and i dont understand this particular line.
“They could also reduce the prices by a little less than 7% (say 5%) in order to increase internal margins a little.”What does it mean. To reduce the selling price when cost stays the same wouldnt it be reducing the profit. The point being to maximise sales maximise profit right? Or they actually mean to say reduce the variance is cost by 5%? What is price reference to
In the Q it stated “Assume that the cost of a GC falls by approximately 7% …”
The suggested answer first points out that maintaining the current (50% mark-up) policy would pass on the cost saving to the customer. The point you are querying is saying that of course it doesn’t have to pass on the whole cost saving – and as long as it does not reduce the selling price by as much as 7%, the margin (currently 33% on sales) will be increased.
Thank you i understand now.
Also another question id like to ask for clarification from UHS universal heath
part d) 3 difficulties in target costing in serviceI had a look at the examiners answer and i cant comprehend this part where it says
forgot to include;
“It would be difficult to use target costing for new services
The private sector initially developed the use of target costing in the service sector with the intention that it should only be used for new services rather than existing ones. Considering the work that a hospital performs particularly, it would be difficult to establish target costs when there is no comparative data available, unless other hospitals have already provided services and the information can be obtained from them.”
Does it mean that it is advocating target cost for new service or not? Because on the second part it says that its not but the first part its the intention for new service
Also i wanted to know
where does this statement comes from?
“The private sector initially developed the use of target costing in the service sector with the intention that it should only be used for new services rather than existing ones. ”
is it a fact or assumption?I had a look at accowtancy website note on this particular subject.
It says that The main focus of target costing is not finding what a new product does cost but what it should or needs to cost. so applying target costing to new products are basically not suitable right? or is there two sides to the coins. May i know if anything in evaluation of a performance or question (excluding variance analysis) to describe or analyse, do need to give two points of view, saying things as if its a grey area where theres no definitive answer or is it like calling a spade a spade.For example,
Target cost can be used in service and manufacturing.(definite)
Target cost cay may or may not be used for new product (subjective)
While it also produce a negative result in this one area it produces good result on the other area (subjective)Im finding trouble in the techniques for answering and also producing inputs point on which aspect to consider when evaluating
Hi – I missed your additional posts because you put them on the same thread. (It’s a good idea to post new Qs on different topics to a new thread.)
For (d) – the answer is responding to “difficulties” for the trust.
Target costing may be used for new products where cost savings can be identified during the design stage and existing products where cost savings can be achieved without changing the design. If cost cannot be changed (for whatever reason), target costing is no use (because there would be no way to reduce the gap).
The point about target costing is that the starting point is not the cost to which a margin is added but the selling price from which the required (acceptable) margin must be deducted to derive the target cost. So target costing is used in situations where the provider of the good or service has to accept the “selling price” (e.g. a market price in a competitive market). In this Q the trust has to accept the pre-set tariff for each service.
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