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sir how do we know whether full cost plus pricing includes production costs only or non-production costs also??
For the exam it includes production costs only unless the question says differently.
but sir in Helot Co(2016) full cost plus pricing approach had been used and in that question they had included non-production costs to find out full cost and then compared it with target cost, to find if a cost gap exists or not
Helot Co has previously used a traditional absorption costing system and full cost plus pricing to cost and price its products. It has recently recruited a new finance director who believes the company would benefit from using target costing. He is keen to try this method on a new game concept called Spartan, which has been recently approved.
After discussion with the board, the finance director undertook some market research to find out customers’ opinions on the new game concept and to assess potential new games offered by competitors. The results were used to establish a target selling price of $45 for Spartan and an estimated total sales volume of 350,000 units. Helot Co wants to achieve a target profit margin of 35%.
The finance director has also begun collecting cost data for the new game and has projected the following:
Production costs per unit $ Direct material 3.00 Direct labour 2.50 Direct machining 5.05 Set?up 0.45 Inspection and testing 4.30 Total non?production costs $000 Design (salaries and technology) 2,500 Marketing consultants 1,700 Distribution 1,400
answer:
Target price is $45 and the profit margin is 35% which results in a target cost of $29.25. The current estimated cost is $31.30 which results in a cost gap of $2.05.=(2500+1700+1400)x1000/35000units=16$/unit of total non-production cost/unit has been added
This is not a full cost pricing question. The question says that they previously used full cost pricing but they are now going to use target costing. (I didn’t miss your question – I cannot answer all questions at the same time 🙂 )
So sir are you suggesting that when we use target costing approach we need to include all costs whether production or non-production?
Yes (unless obviously the question says different).
Please do not type out full past exam questions – they are copyright of the ACCA and they get upset. I have all past exam questions and so you only need to give the name and date of the exam 🙂
Hi Sir, could you help me understand how the current cost price is $31.30 please?
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