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SCM Chapter 7

The document discusses life cycle costing and target costing. It provides a three year life cycle income statement for two products (RM 200 and RM 800) that shows revenues, costs and profits over the life of the products. It also provides a schedule showing the percentage of total costs accounted for by each cost category. Finally, it presents an example of target costing, showing how to calculate the maximum allowable warehousing cost.

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63 views4 pages

SCM Chapter 7

The document discusses life cycle costing and target costing. It provides a three year life cycle income statement for two products (RM 200 and RM 800) that shows revenues, costs and profits over the life of the products. It also provides a schedule showing the percentage of total costs accounted for by each cost category. Finally, it presents an example of target costing, showing how to calculate the maximum allowable warehousing cost.

Uploaded by

mini moni
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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PROBLEM 2(LIFE CYCLE COSTING)

1. How would a product life-cycle income statement differ from this calendar-year income statement

product life cycle income statement takes into consideration all revenues and costs incurred during the
total life cyle of the product and even research and development costs are included. Calendar year
statement, on the other hand, different statements are prepared for each financial year and revenues and
cost are reported period wise. the non production cost such as research and development cost are
normally amortized during product's useful life.

2 Three year life cycle income statement

Year 1
Particulars Particulars
RM 200 RM800
Revenue (Costs + Net income) 500,000.00 900,000.00 Revenue (Costs + Net incom
Costs: Costs:
Research and Development 1,000,000.00 1,150,000.00 Research and Development
Prototypes 300,000.00 550,000.00 Prototypes
Marketing 60,000.00 124,000.00 Marketing
Distribution 80,000.00 170,000.00 Distribution
Manufacturing 20,000.00 85,000.00 Manufacturing
Customer Service - - Customer Service
Total Costs 1,460,000.00 2,079,000.00 Total Costs
Income (960,000.00) (1,179,000.00) Income

Year 3
Particulars Particulars
RM 200 RM800
Revenue (Costs + Net income) 2,500,000.00 2,000,000.00 Revenue (Costs + Net incom
Costs: Costs:
Research and Development - - Research and Development
Prototypes - 10,000.00 Prototypes
Marketing 475,000.00 260,000.00 Marketing
Distribution 130,000.00 410,000.00 Distribution
Manufacturing 1,000,000.00 700,000.00 Manufacturing
Customer Service 85,000.00 10,000.00 Customer Service
Total Costs 1,690,000.00 1,390,000.00 Total Costs
Income 810,000.00 610,000.00 Income
Product RM 200 is more profitable since net income of RM 200 is higher than RM 800

3. Prepare a schedule showing weach cost category as a percentage of total annual cost

Higher R&D costs indicates the company is investing in R&D and producing
products as per consumer preferences, making best use of technological advances or best production
methods. This is evident from the lesser % of customer service cost.

Total Total Cost


Particulars
RM 200 RM800 of both products
Costs:
Research and Development 1,000,000 1,150,000 2,150,000
Prototypes 350,000 590,000 940,000
Marketing 855,000 584,000 1,439,000
Distribution 330,000 880,000 1,210,000
Manufacturing 1,820,000 1,385,000 3,205,000
Customer Service 145,000 30,000 175,000
Total Costs 4,500,000 4,619,000 9,119,000

PROBLEM 5(TARGET COSTING)

Sales Revenue (100,000 x 10) 1,000,000


Costs:
Purchase (100,000 x 5) -500,000
Purchase order (1,000 x 100) -100,000
Warehousing (8,000 x 20) -160,000
Distributing ( 500 x 80) -40,000
Fixed Operating Cost -100,000
Operating income 100,000
Target Cost:
Sales Revenue ( 100,000 x 10 x 95%) 950,000
Desired profit -100,000
Total Cost allowed 850,000
Costs excluding warehousing
Purchase (500,000 x 96%) -480,000
Purchase order (800 x 100) -80,000
Distributing (500 x (80-5)) -37,500
Fixed Operating Cost -100,000
Maximum warehousing cost 152,500
come statement

s incurred during the


ded. Calendar year
ear and revenues and
elopment cost are

Year 2
Particulars
RM 200 RM800
Revenue (Costs + Net income) 2,000,000.00 1,800,000.00

Research and Development - -


Prototypes 50,000.00 30,000.00
320,000.00 200,000.00
Distribution 120,000.00 300,000.00
Manufacturing 800,000.00 600,000.00
Customer Service 60,000.00 20,000.00
Total Costs 1,350,000.00 1,150,000.00
650,000.00 650,000.00

Total
Particulars
RM 200 RM800
Revenue (Costs + Net income) 5,400,000.00 4,700,000.00

Research and Development 1,000,000.00 1,150,000.00


Prototypes 350,000.00 590,000.00
855,000.00 584,000.00
Distribution 330,000.00 880,000.00
Manufacturing 1,820,000.00 1,385,000.00
Customer Service 145,000.00 30,000.00
Total Costs 4,500,000.00 4,619,000.00
900,000.00 81,000.00
d producing
ances or best production
ice cost.

% Total Cost
of both products

23.58%
10.31%
15.78%
13.27%
35.15%
1.92%
100%

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