OBJE CTIVE TEST QUES TI ONS – SEC TI ON A : S E CTI O N 1

41 DRP Ltd has recently introduced an activity-based costing (ABC) system. It manufactures
three products, details of which are set out below:
Product: D R P
Budgeted annual production (units) 100,000 100,000 50,000
Batch size (units) 100 50 25
Machine set-ups per batch 3 4 6
Purchase orders per batch 2 1 1
Processing time per unit (minutes) 2 3 3
Three cost pools have been identified. Their budgeted costs for the year ending 30 June
2003 are as follows:
Machine set-up costs $150,000
Purchasing of materials $70,000
Processing $80,000
What is the budgeted machine set-up cost per unit of product R?

A $6.52
B $0.52
C $18.75
D $1.82

TARGET COSTING

42 In target costing, which of the following would be an appropriate strategy to reduce a

cost gap for a product that existed in a competitive industry with demanding
shareholders?
A Increase the selling price
B Reduce the expectation gap by reducing the selling price
C Reducing the desired margin on the product
D Mechanising production in order to reduce average production cost

43 Which of the following strategies would be an immediately acceptable method to reduce

an identified cost gap?

A Reduce the desired margin without discussion with business owners

B Reduce the predicted selling price
C Source similar quality materials from another supplier at reduced cost
D Increase the predicted selling price

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44 The predicted selling price for a product has been set at $56 per unit. The desired mark-up
on cost is 25% and the material cost for the product is estimated to be $16 before allowing
for additional materials to allow for shrinkage of 20% (for every 10 kg of material going in
only 8 kg comes out).

If labour is the only other cost and 2 hours are needed what is the most the business can
pay per hour if a cost gap is to be avoided?

The maximum rate per hour is (2 d.p) $

45 Which of the following techniques is NOT relevant to target costing?

A Value analysis
B Variance analysis
C Functional analysis
D Activity analysis

46 The selling price of product Zigma is set to be $250 for each unit and sales for the coming
year are expected to be 500 units. The company requires a return of 15% in the coming
year on its investment of $250,000 in product Zigma.

What is the target cost for each unit of Zigma for the coming year? Select from the list as
appropriate.

List options are as follows:

• $145
• $155
• $165
• $175

47 VC Co is a firm of opticians. It provides a range of services to the public, such as eye tests
and contact lens consultations, and has a separate dispensary selling glasses and contact
lenses. Patients book appointments with an optician in advance.

A standard appointment is 30 minutes long, during which an optician will assess the
patient’s specific requirements and provide them with the eye care services they need.
After the appointment, patients are offered the chance to buy contact lenses or glasses
from the dispensary.
Which of the following describes a characteristic of the services provided by an optician
at VC Co during a standard appointment?
A Tangible
B Homogeneous
C Non-perishable
D Simultaneous

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3 Using ABC, what is the overhead cost per unit for each unit of Else (to two decimal
places,)?

$________

4 If Bowd changed to ABC, the overhead cost per unit of Dest would be $116.83.

What is the purchase order cost per unit included in the $116.83 (to the nearest $)?

$________

5 For Dest, if ABC is used, what is the decrease in overhead cost per unit compared to
the current labour hour based absorption costing system?

A $17.77
B $7.09
C $10.62
D $23.89

246 HELOT CO (SEPTEMBER 2016)

Helot Co develops and sells computer games. It is well known for launching innovative and
interactive role-playing games and its new releases are always eagerly anticipated by the
gaming community. Customers value the technical excellence of the games and the durability
of the product and packaging.
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

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 OB JE CTIV E TES T CASE STUD Y QUE STIONS – SE CTION B : S EC T I ON 2

1 Which of the following statements would the finance director have used to explain
to Helot Co’s board what the benefits were of adopting a target costing approach so
early in the game’s life-cycle?

(1) Costs will be split into material, system, and delivery and disposal categories for
improved cost reduction analysis.
(2) Customer requirements for quality, cost and timescales are more likely to be
included in decisions on product development.
(3) Its key concept is based on how to turn material into sales as quickly as possible
in order to maximise net cash.
(4) The company will focus on designing out costs prior to production, rather than
cost control during live production.
A (1), (2) and (4)
B (2), (3) and (4)
C (1) and (3)
D (2) and (4) only

2 What is the forecast cost gap for the new game?

A $2.05
B $0.00
C $13.70
D $29.25

3 The board of Helot Co has asked the finance director to explain what activities can be
undertaken to close a cost gap on its computer games.

Which of the following would be appropriate ways for Helot Co to close a cost gap?
Place a tick in the boxes in the table below as appropriate.
Appropriate Not an
ways to appropriate
close a cost ways to close
gap a cost gap
Buy cheaper, lower grade plastic for the game discs
and cases.
Using standard components wherever possible in
production.
Employ more trainee game designers on lower
salaries.
Use the company’s own online gaming websites for
marketing.

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4 The direct labour cost per unit has been based on an expected learning rate of 90% but
now the finance director has realised that a 95% learning rate should be applied.

Which of the following statements is true?

A The target cost will decrease and the cost gap will increase
B The target cost will increase and the cost gap will decrease
C The target cost will remain the same and the cost gap will increase
D The target cost will remain the same and the cost gap will decrease

5 Helot Co is thinking about expanding its business and introducing a new computer
repair service for customers. The board has asked if target costing could be applied to
this service.

Which of the following statements regarding services and the use of target costing
within the service sector is true?
A The purchase of a service transfers ownership to the customer
B Labour resource usage is high in services relative to material requirements
C A standard service cannot be produced and so target costing cannot be used
D Service characteristics include uniformity, perishability and intangibility

247 CHEMICAL FREE CLEAN CO (DECEMBER 2015)

The Chemical Free Clean Co (C Co) provides a range of environmentally-friendly cleaning
services to business customers, often providing a specific service to meet a client’s needs. Its
customers range from large offices and factories to specialist care wards at hospitals, where
specialist cleaning equipment must be used and regulations adhered to.
C Co offers both regular cleaning contracts and contracts for one-off jobs. For example, its
latest client was a chain of restaurants which employed them to provide an extensive clean
of all their business premises after an outbreak of food poisoning.
The cleaning market is very competitive, although there are only a small number of
companies providing a chemical free service. C Co has always used cost-plus pricing to
determine the prices which it charges to its customers but recently, the cost of the cleaning
products C Co uses has increased. This has meant that C Co has had to increase its prices,
resulting in the loss of several regular customers to competing service providers.
The finance director at C Co has heard about target costing and is considering whether it
could be useful at C Co.

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 OB JE CTIV E TES T CASE STUD Y QUE STIONS – SE CTION B : S EC T I ON 2

1 What would be, in the right sequence, the main steps involved in deriving a target
cost for C Co?

A Define the service, set a target price, derive the operating profit and calculate a
target cost.
B Set a target price, derive the total operating profit, calculate a target cost per
hour and define the service.
C Define the service, derive the operating profit, set a target price and calculate a
target cost.
D Define the service, derive a target price, calculate a target cost and set the
operating profit.

2 Which TWO of the following statements correctly explain the difficulties faced if
target costing is used in a service industry?

• The service can be defined too easily and lacks the necessary complexity.
• The service is used at the same time it is produced.
• The service is standardised too easily.
• Unused labour capacity cannot be stored for use the next day.

3 Which of the following statements is/are true?

(1) C Co may not be able to get hold of any comparative data available for the one-
off jobs, and therefore setting the target cost will be difficult.
(2) Some of the work available is very specialist. It may be difficult to establish the
market price for a service like this, thus making it difficult to derive a target cost.
A (1) only
B (2) only
C Both (1) and (2)
D Neither (1) nor (2)

4 Which TWO of the following statements are true?

• Target costing is useful in competitive markets where a company is dominant in

their market, like C Co is.
• Target costing is useful in C Co’s competitive market in which price increases
does lead to loss of customers.
• C Co can ignore the market price for cleaning services and simply pass on cost
increases as it has done.
• Target costing would help C Co to focus on the market price of similar services
provided by competitors, where this information is available.

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5 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)

248 VOLT CO (MARCH 2019, ADAPTED)

Volt Co generates and sells electricity. It operates two types of power station: nuclear and
wind. The costs and output of the two types of power station are detailed below:
Nuclear station
A nuclear station can generate 9,000 gigawatts of electricity in each of its 40 years of useful
life. Operating costs are $486m per year. Operating costs include a provision for depreciation
of $175m per year to recover the $7,000m cost of building the power station.
Each nuclear station has an estimated decommissioning cost of $12,000m at the end of its
life. The decommissioning cost relates to the cost of safely disposing of spent nuclear fuel.
Wind station
A wind station can generate 1,750 gigawatts of electricity per year. It has a life cycle cost of
$55,000 per gigawatt and an average operating cost of $40,000 per gigawatt over its 20-year
life.

1 What is the life-cycle cost per gigawatt of the nuclear station (to the nearest $000)?

A $54,000
B $73,000
C $87,000
D $107,000

2 Which of the following will decrease the total life cycle cost of a nuclear station?

(1) Increasing the useful life of the station.

(2) Reducing the decommissioning cost.
A (1) only
B (2) only
C Both (1) and (2)
D Neither (1) nor (2)

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