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Question 1 Tutorials

Target costing allows companies to integrate cost considerations into early product design. This helps identify cost reduction opportunities upfront and avoid expensive redesigns later. Implementing target costing during design allocates resources efficiently and lets companies focus on cost cutting from the start. It also helps accelerate time-to-market for new products. Having accurate cost driver rate data enables setting realistic cost targets and finding specific ways to lower expenses through design changes.

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16 views

Question 1 Tutorials

Target costing allows companies to integrate cost considerations into early product design. This helps identify cost reduction opportunities upfront and avoid expensive redesigns later. Implementing target costing during design allocates resources efficiently and lets companies focus on cost cutting from the start. It also helps accelerate time-to-market for new products. Having accurate cost driver rate data enables setting realistic cost targets and finding specific ways to lower expenses through design changes.

Uploaded by

Jeremiah Ncube
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 PPTX, PDF, TXT or read online on Scribd
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PERFORMANCE MANAGEMENT ACCOUNTING CUACM 413

PRESENTATION

Lecturer : J Ndhlovu
School : School of Entrepreneurship and Business Science
Department : Department of Accounting Science and Finance
Programme : Bachelor of Science Honours Degree in Accountancy
Surname and Name Reg No
Group 17
Chakabuda Leisel C20142418N
Chakaipa Tawanda C20141654V
Hwami Rumbidzo C20142880I
Mabgwe Laura C20142110S
Madhuku Blessing C20143385G
Makunde Tinashe C20141513B
Mathende Vimbainashe C20141904C
Magede Tilda C20142172H
Mukoti Mufaro C20143177X
GROUP PRESENTATION

QUESTION 1
(a) Calculation of Target Cost

• ROI =
0.8 =
X = 0.08 * $300,000
= $24,000
= $24,000/600units
= $40/unit
Target Cost
$

Target Selling Price 90

Target Profit (40)

Target Cost 50
The significance of the figure
• Target cost is an estimate of a product cost which is determined by subtracting a
desired profit margin from a competitive market price. This target cost may be less
than the planned initial product cost but it is expected to be achieved by the time
the product reaches the maturity stage of the product life cycle.
• The target cost represents the maximum cost that the company can afford to
incur in manufacturing the music player while achieving the desired ROI and
selling price.
• It acts as a guideline for the production division to keep costs under control and
profitability guaranteed. Should the projected manufacturing costs above the
intended cost, it could suggest that the production process would not be
financially sustainable.
(b) Calculations of the new ROI
Target Profit = Target Selling Price – Estimated Manufacturing
Cost – variable Selling Cost

= $90 – $60
= $30 per unit

New ROI = * 100

= *100
Comment on the production director’s suggestion
• The production director's suggestion of accepting a reduced ROI would result in a new ROI of
6%. This is lower than the company's required ROI of 8%.
• Accepting a lower ROI means the company would not achieve its desired return on
investment.
• The company cannot accept this suggestion. The company has determined that a return of
8% is required for investments, and it must achieve this rate if the profits from the new
music player are to be adequate to cover the cost of the finance obtained in order to fund the
$300,000 capital investment
• The production director's suggestion may not be advisable from a financial perspective.
• Instead of considering a lower ROI they can also reduce the manufacturing cost per unit.
• The finance director herself has suggested that the design incorporates costly features
which add little value to the product, so there should ample room for design modification.
For example, DVDs, digital downloads, and cassette tapes are now widely considered to be
an out-of-date technology, so these features of the music player could probably be removed
without significantly damaging demand for the product by replacing them with the
© effectiveness of target costing at designing stage

Design stage
Target costing allows cost considerations to be integrated into the product design process. By implementing target
costing early in the design stage, cost-saving opportunities can be identified and incorporated into the product's design.
This proactive approach helps avoid costly design changes or modifications later in the production stage.
Impact on Time and Resources
Implementing target costing at the design stage allows companies to allocate resources efficiently. It enables them to
focus on cost reduction efforts from the outset, reducing the need for costly redesigns or rework later in the product
development process. By addressing cost considerations early, companies can streamline their efforts and minimize
time-to-market for new products.
Cost driver rates
Target costing relies on accurate and comprehensive information about cost driver rates, which are the factors that
influence the costs of a product or its components. These rates provide insights into the cost structure of the product and
help identify areas where cost reductions can be achieved. Having access to cost driver rates from the accounting system
enables more accurate cost estimation and target setting.
Identification of Cost Reduction Opportunities
The availability of detailed cost driver rate information facilitates the identification of specific areas where costs can be
reduced. By analyzing these rates, companies can pinpoint opportunities for efficiency improvements, material
substitutions, or process enhancements that contribute to overall cost reduction while maintaining product quality.

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