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“Narrowing the cost gap is the key aim in the process of target costing to ensure that product reaches at the target profit” (TRUE)
I understand whole statement all the things are true in the statement but in the end statement is saying that “we narrow the cost gap to ensure that product reaches at TARGET PROFIT”. I think we narrow the cost gap to ensure that product reaches at its TARGET COST not PROFIT because in the cost gap formula (estimated cost – target cost) we reduce cost gap so that our estimated cost get equal to target cost it means that product is reaches its TARGET COST NOT PROFIT then why this statement is true ?
The target cost is calculated so as to achieve the target profit.
Have you watched my free lectures on target costing? 🙂
Okay so I will take this in that sense when we estimate our per unit cost and deduct it from selling price (S.P) then the profit would be say, $8 but when we calculate our desired margin on S.P then it is $10 so that’s why we close that cost gap to take our profit from $8 to $10 (to achieve target profit).
Right ?KAPLAN: CHEMICAL FREE CLEAN CO (DECEMBER 2015)
Which of the following statement(s) is/are true?
(1) If after calculating a target cost C Co finds that a cost gap exists, it will then be
forced to examine its internal processes and costs more closely.(2) If C Co cannot achieve any reduction in the cost of the cleaning products it uses,
it should consider whether it can source cheaper non-chemical products from
alternative suppliers.A (1) only
B (2) only
C Both (1) and (2)
D Neither (1) nor (2)C is the right answer
Why statement 1 is true ?
Who force company to reduce the cost gap ?
The first of your two posts is correct.
As far as your second post is concerned, it is not that anyone outside is forcing the company to do anything. It is meaning that if there is a cost gap the company will have to reduce the costs if they are to achieve the target cost (and hence their target profit). So adopting a target costing approach makes it necessary (it forces them) to do this.
(Again, have you watched my free lectures on this? 🙂 )
Yeah I had watched your free lectures on Youtube and raised some doubts which you had cleared me.
Thank you so much sir!
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