The Institute of Finance Management

Department Accounting and Finance

Tutorial Questions
Management Accounting
Targeting Costing
Instructor: Dr Zawadi Ally

QUESTION 1
Explain how target costing is different from cost plus pricing

QUESTION 2
Why is it important to manage costs before products have been produced?

QUESTION 3
At what stage of the product development cycle does target costing play a key role?
QUESTION 4
Explain how target costing is different from cost plus pricing
QUESTION 5
BM is the company that manufactures mobile phones. This market is extremely volatile and
competitive and achieving adequate product profitability is extremely important. BM is a mature
company that has been producing electronic equipment for many years and has all the costing
systems in place that one would expect in such a company. These include a comprehensive
overhead absorption system, annual budgets monthly variance reports and a balanced scorecard
for performance. The company is considering introducing
(a) Targeting costing
(b) Life cycle costing system

REQUIRED
Discuss the advantages (or otherwise) that this specific company is likely to gain from these two
systems

QUESTION 6
Target costing is the process of translating a customer’s view of a product into an engineer’s view
of a product. Illustrate what this statement means when using a product. (Hint: Use a product you
are familiar with such as a telephone, a watch, a radio, etc.)
A company is planning a new product. Market research information suggests that the product
should sell 10,000 units at Shs.21.00/unit. The company seeks to make a mark-up of 40% of
product cost. It is estimated that the lifetime costs of the product will be as follows:
1. Design and development costs Shs.50,000
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 2. Manufacturing costs Shs.10/unit
3. End of life costs Shs.20,000
The company estimates that if it were to spend an additional Shs. 15,000 on design,
manufacturing costs/unit could be reduced.

REQUIRED:
(a) What is the target cost of the product?
(b) If the additional amount were spent on design, what is the maximum manufacturing cost per
unit that could be tolerated if the company is to earn its required markup?

QUESTION 8
ABC Co assembles and sells many types of radio. It is considering extending its product range to
include digital radios. These radios produce a better sound quality than traditional radios and have
a large number of potential additional features not possible with the previous technologies (station
scanning, more choice, one-touch tuning, station identification text and song identification text
etc).
A radio is produced by assembly workers assembling a variety of components. Production
overheads are currently absorbed into product costs on an assembly labour hour basis. ABC Co is
considering a target costing approach for its new digital radio product.

REQUIRED
a) Briefly describe the target costing process that ABC Co should undertake.
b) Explain the benefits to ABC Co of adopting a target costing approach at such an early stage
in the product development process.
c) Assuming a cost gap was identified in the process, outline possible steps ABC Co could
take to reduce this gap.

QUESTION 9
GM Co assembles and sells many types of car radios. It is considering extending its product range
to include digital radios. These radios produce better sound quality than traditional radios and have
a large number of potential additional features not possible with the previous technologies. A radio
is produced by assembly workers assembling a variety of components. Production overhead costs
are currently absorbed into product costs on an assembly labour hour basis. GM Co is considering
a target costing approach for its new digital radio product.

The additional information on GM Co for radio production is given below:

A selling price of Shs 440,000 has been set in order to compete with a similar radio on the market
that has comparable features to GM Co’s intended product. The board has agreed that the
acceptable margin (after allowing for all production costs) should be 20%. The cost information
for the new radio is as follows:

Component 1 (Circuit board) – these are bought in and cost Shs 41,000 each. They are bought in
batches of 4,000 and additional delivery costs are Shs 24,000,000 per batch.
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 the wire is occasionally cut to the wrong

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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 Shs 5,000 per metre to buy. Other materials – other
materials cost Shs 81,000 per radio. Assembly labour – these are skilled people who are difficult
to recruit and retain. GM 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 Shs 126,000 per hour. It is estimated that 10% of hours paid to
the assembly workers is for idle time. Production Overheads – A recent historic cost analysis has
revealed the following production overhead data:
Month 1 (Shs) Month 2 (Shs)
Total production overhead 6,200,000,000 7,000,000,000
Total assembly labour hours 19,000 23,000
Fixed production overheads are absorbed on an assembly-hour basis based on normal annual
activity levels. In a typical year 240,000 assembly hours will be worked by GM Co.

REQUIRED:
(a) Briefly describe the target costing process that GM Co should undertake.
(b) Explain the benefits to GM Co of adopting a target costing approach at such an early stage in
the product development process
(c) Assuming a cost gap was identified in the process, outline possible steps GM Co could take to
reduce this gap.
(d) Using the information above calculate the expected cost per unit for the radio and identify any
cost gap that might exist

QUESTION 10
Best Products Ltd has an aggressive research and development programme and uses target costing
to aid in the final decision to release new products for production. A new product is being
evaluated. Market research has surveyed the potential market for this product and believes that its
unique features will generate a total demand of 50,000 units at an average price of Shs 2,300 per
unit. The design and production engineering departments have performed a value analysis on the
product and have determined that the total cost for the various value chain functions using the
existing process technology are as follows.

Value chain function Total cost over product life (Shs ‘000’)
Research and development 15,000
Design 7,500
Manufacturing 50,000
Marketing 8,000
Distribution 14,000
Customer service 7,500
Total cost over product life 102,000

Management’s target profit is set at 20% of sales. Production engineering indicates that new
process technology can reduce the manufacturing cost by 40%, but it will cost Shs. 10,000,000.

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REQUIRED:
a) Target costing and value engineering are commonly adopted by manufacturing firms in
new product development. Describe and explain the terms “target costing” and “value
engineering”.
b) Analyse and explain whether the new product should be released to production under the
following two assumptions:
i. Existing process technology is used
ii. New process technology is purchased.