BUS-091 Managerial Accounting Module 4

Questions and Answers

What is the primary goal of target costing when designing a product?

To meet a specific profit margin by keeping costs below a maximum allowable limit (correct)

To create a product with the highest possible selling price

To ensure the product exceeds set quality standards

To maximize the number of features in the product

How does target costing differ from cost-plus pricing?

Target costing guarantees a profit margin, while cost-plus pricing does not

Cost-plus pricing calculates a selling price based on costs plus a markup, whereas target costing sets a target cost based on desired profits (correct)

Target costing is focused solely on product features, while cost-plus pricing ignores them

Cost-plus pricing requires market research, but target costing doesn't

In the example given, what was the price point set by the marketing team for the new backpack?

$140 (correct)

$145

$150

$135

What type of product is the example based on?

A hiking backpack Signup and view all the answers

What does overengineering refer to in the context of product design?

Adding unnecessary features that do not provide value to customers Signup and view all the answers

What was the proposed quantity of backpacks that the company expected to sell?

5,000 Signup and view all the answers

What investment amount was required to launch the new product line?

$300,000 Signup and view all the answers

What was the selling price of the competitor's CDT pack?

$145 Signup and view all the answers

Which factor should a company focus on to avoid overengineering a product?

Understanding customer needs and market demand Signup and view all the answers

What is a target profit in the context of the new product line?

The desired profit above and beyond expenses Signup and view all the answers

What is the primary difference between target costing and cost plus pricing?

Target costing sets maximum allowable costs based on desired profit, while cost plus pricing marks up costs to determine price. Signup and view all the answers

If a product's expected selling price is $60 and the desired target profit is $50, what is the target cost per unit?

$45 Signup and view all the answers

What concept is closely related to target costing in product design?

Value engineering Signup and view all the answers

In target costing, what happens if the production cost exceeds the maximum allowable target cost?

The product design must be modified to meet cost requirements. Signup and view all the answers

Which of the following statements correctly describes the approach of cost plus pricing?

It determines the product price after calculating the production costs. Signup and view all the answers

In target costing, the maximum allowable costs to produce a product are determined after the product is designed.

False Signup and view all the answers

The concept of value engineering is unrelated to target costing.

False Signup and view all the answers

If the production cost exceeds $45, the company will achieve its target profit of $50 per unit.

False Signup and view all the answers

Cost plus pricing involves determining the selling price based on fixed production costs and a profit markup.

True Signup and view all the answers

In the example given, the expected selling price of the product is $60, which corresponds to a target cost of $45.

True Signup and view all the answers

Describe the process of target costing and how it relates to product design.

Target costing involves setting a selling price first and then determining the maximum allowable costs to design and produce the product. This ensures that production costs do not exceed the target cost, allowing the company to achieve its desired profit. Signup and view all the answers

Explain the importance of setting a target profit when using target costing.

Setting a target profit is crucial because it directly influences the target cost, guiding the design and production process to ensure profitability. If production costs exceed the target cost, the company cannot achieve its intended profit margin. Signup and view all the answers

What is the main difference between target costing and cost-plus pricing?

The main difference is that target costing sets the price based on market conditions and then determines costs, while cost-plus pricing calculates the selling price based on production costs plus a markup. Target costing is more market-driven. Signup and view all the answers

Why is value engineering important in the target costing process?

Value engineering is important because it helps identify ways to design and produce the product cost-effectively without sacrificing quality, ensuring that the production cost remains within the target limits. This increases the potential for profitability. Signup and view all the answers

What consequences does a company face if its production costs exceed the target cost in target costing?

If production costs exceed the target cost, the company fails to achieve its target profit, potentially leading to financial losses and a lack of competitiveness in the market. This can hinder long-term viability. Signup and view all the answers

What does opportunity cost refer to when using a machine for production?

The potential benefit lost from making another product Signup and view all the answers

Why is it important for managers to consider qualitative factors in decision-making?

Ignoring qualitative factors can lead to poor morale and serious mistakes Signup and view all the answers

What is the focus of the incremental analysis approach in decision-making?

Considering only those costs and revenues that differ between alternatives Signup and view all the answers

Which of the following is considered a relevant cost for decision-making?

Variable costs that differ between alternatives Signup and view all the answers

What impact does outsourcing typically have on a company?

Reduces control over delivery times and product quality Signup and view all the answers

What characterizes relevant non-financial information in managerial decisions?

It affects future outcomes and varies between alternatives Signup and view all the answers

How can discount pricing for select customers negatively affect regular customers?

It may create feelings of unfairness and dissatisfaction among regular customers Signup and view all the answers

What distinguishes relevant costs from irrelevant costs in decision making?

Relevant costs vary between alternatives. Signup and view all the answers

Which of the following is an example of a sunk cost?

Repair costs incurred on an old car. Signup and view all the answers

In what situation would opportunity cost be relevant for decision making?

When evaluating the benefits of selecting one alternative over another. Signup and view all the answers

Why are past costs considered irrelevant in making future decisions?

They do not change regardless of future actions. Signup and view all the answers

Which of the following would most likely be considered a relevant cost in deciding whether to buy a new car?

The insurance premium of the new car. Signup and view all the answers

What is the primary role of a manager in understanding relevant costs for decision making?

To distinguish which costs affect short-term decisions. Signup and view all the answers

What would be classified as an irrelevant cost when considering whether to close a store?

Compensation packages of upper management. Signup and view all the answers

Which concept involves evaluating the cost of forgoing one option for another?

Opportunity cost. Signup and view all the answers

What defines opportunity cost in the context of using a machine for production?

The loss of benefits from not producing another type of product with the same machine Signup and view all the answers

In decision-making, why is it essential for managers to consider qualitative factors?

They can significantly impact employee morale and community relations Signup and view all the answers

What is the primary focus of the incremental analysis approach?

To only consider costs and revenues that differ between alternatives Signup and view all the answers

How do relevant non-financial information and relevant financial information compare?

They have distinct characteristics and relevance across various decisions Signup and view all the answers

What potential issue might arise from outsourcing a product?

Reduced control over delivery time and product quality Signup and view all the answers

What is a critical distinction between fixed costs and variable costs in managerial analysis?

They require separate analysis due to their different behaviors Signup and view all the answers

What is a likely consequence of discounting prices for select customers?

Upset feelings from regular customers Signup and view all the answers

What defines relevant costs in a decision-making context?

Costs that will be incurred in the future and differ between alternatives Signup and view all the answers

Why are sunk costs considered irrelevant in decision-making?

They have already been incurred and cannot be changed. Signup and view all the answers

What is the best example of opportunity cost in a business decision?

The revenue lost while choosing one supplier over another. Signup and view all the answers

Which of the following best describes irrelevant costs?

Costs that do not vary regardless of the decision made. Signup and view all the answers

When considering whether to buy a new car, which of the following would be classified as a relevant cost?

Insurance premium for the new car. Signup and view all the answers

What kind of costs are specifically excluded from consideration when making short-term managerial decisions?

Past costs that cannot be altered. Signup and view all the answers

How do relevant costs differ from irrelevant costs in the context of business decisions?

Relevant costs will change with differing alternatives while irrelevant costs will not. Signup and view all the answers

Which statement best captures the idea of opportunity cost?

It represents the potential benefits lost when choosing one alternative over another. Signup and view all the answers

Relevant costs can only be incurred in the future.

True Signup and view all the answers

Opportunity costs are defined as the benefits received from the course of action chosen.

False Signup and view all the answers

Sunk costs should be considered when making future business decisions.

False Signup and view all the answers

Irrelevant costs differ between alternatives and influence managerial decisions.

False Signup and view all the answers

The CEO's salary is considered a relevant cost when deciding whether to close a store.

False Signup and view all the answers

What are relevant costs and why are they critical for short-term business decisions?

Relevant costs are future costs that will differ between alternatives and influence decision-making. They are critical because managers need to consider only those costs that will change as a result of a business decision. Signup and view all the answers

Explain the concept of sunk costs and their role in business decision-making.

Sunk costs are costs that have already been incurred and cannot be recovered. They are irrelevant in decision-making because they do not affect future financial outcomes. Signup and view all the answers

What is opportunity cost, and how can it impact managerial choices?

Opportunity cost is the cost of forgoing the next best alternative when making a decision. It impacts managerial choices by highlighting what must be given up to pursue a specific course of action. Signup and view all the answers

How do relevant costs differ between alternatives, and what implication does this have for decision-making?

Relevant costs differ between alternatives based on the specific circumstances of each choice, such as prices and conditions. This implication emphasizes that managers must analyze all potential options to select the most financially beneficial one. Signup and view all the answers

In what situations would a CEO's salary be considered an irrelevant cost in decision-making?

A CEO's salary is considered irrelevant when decisions are made regarding store closures or operational changes because it remains constant regardless of those decisions. Its irrelevance stems from it not being affected by the future actions of the business. Signup and view all the answers

What are relevant costs and how do they influence short-term business decisions?

Relevant costs are future costs that will be incurred as a result of a decision, and they influence short-term business decisions by helping managers compare the financial implications of different alternatives. Signup and view all the answers

What is the opportunity cost, and why is it important for decision-making?

Opportunity cost refers to the potential benefit lost when one alternative is chosen over another. It is important in decision-making because it helps managers evaluate the trade-offs associated with different options. Signup and view all the answers

Explain how sunk costs differ from relevant costs in decision-making.

Sunk costs are expenses that have already been incurred and cannot be recovered, making them irrelevant in future decision-making. In contrast, relevant costs are future costs that can be avoided depending on the decision taken. Signup and view all the answers

In what scenarios might a manager decide to outsource an operating activity?

A manager might decide to outsource when the relevant costs of doing so are lower than in-house production costs, or when outsourcing allows the business to focus on core activities while achieving cost savings. Signup and view all the answers

Why is it essential for managers to differentiate between relevant and irrelevant costs when making decisions?

It is essential for managers to differentiate between relevant and irrelevant costs to avoid making decisions based on costs that do not impact future outcomes, thereby ensuring efficient resource allocation. Signup and view all the answers

Study Notes

Target Costing Overview

Target costing is a pricing strategy focused on determining selling price first, then establishing the maximum allowable costs.
It contrasts with cost-plus pricing, where costs are calculated first, and a markup is applied to set the price.

Cost-Plus vs. Target Costing

Cost-plus pricing involves calculating the production cost (e.g., 40),addingamarkup(e.g.,2540), adding a markup (e.g., 25%), resulting in a selling price (e.g., 40),addingamarkup(e.g.,2550).
Target costing employs a fixed price strategy where the selling price (e.g., $60) is set based on market conditions, followed by calculating target costs to ensure profitability.

Target Cost Calculation

Target profit is subtracted from the selling price to find the target cost:
- Example: Selling price = 60,Targetprofit=60, Target profit = 60,Targetprofit=15, Target cost must be ≤ $45.
Design and engineering of the product must stay within the target cost to ensure successful profit margins.

Importance of Value Engineering

Target costing aims to avoid overengineering—building unnecessary features that do not add substantial value to the customer.

Example Product Launch

A hypothetical ultralight hiking backpack is introduced to compete with ULA's CDT pack priced at $145.
Marketing defines a competitive price point of $140, aiming to sell 5,000 units.

Financial Targets and Profits

Initial costs for product launch estimated at 300,000,witharequiredreturnrateof20300,000, with a required return rate of 20% leading to a desired profit of 300,000,witharequiredreturnrateof2060,000.
Maximum allowable cost calculated as target cost:
- Total sales expected = 140∗5,000packs=140 * 5,000 packs = 140∗5,000packs=700,000
- To achieve a profit of 60,000,costsmusttotal≤60,000, costs must total ≤ 60,000,costsmusttotal≤640,000.
Therefore, the target cost per pack = 640,000/5,000packs=640,000 / 5,000 packs = 640,000/5,000packs=128.

Consequences of Exceeding Costs

If costs exceed $640,000, the project is deemed unsuccessful, as desired profit levels will not be met.
Ensuring production costs remain under target limit is crucial for profitability projections.

Target Costing Overview

Target costing is a pricing strategy focused on determining selling price first, then establishing the maximum allowable costs.
It contrasts with cost-plus pricing, where costs are calculated first, and a markup is applied to set the price.

Cost-Plus vs. Target Costing

Cost-plus pricing involves calculating the production cost (e.g., 40),addingamarkup(e.g.,2540), adding a markup (e.g., 25%), resulting in a selling price (e.g., 40),addingamarkup(e.g.,2550).
Target costing employs a fixed price strategy where the selling price (e.g., $60) is set based on market conditions, followed by calculating target costs to ensure profitability.

Target Cost Calculation

Target profit is subtracted from the selling price to find the target cost:
- Example: Selling price = 60,Targetprofit=60, Target profit = 60,Targetprofit=15, Target cost must be ≤ $45.
Design and engineering of the product must stay within the target cost to ensure successful profit margins.

Importance of Value Engineering

Target costing aims to avoid overengineering—building unnecessary features that do not add substantial value to the customer.

Example Product Launch

A hypothetical ultralight hiking backpack is introduced to compete with ULA's CDT pack priced at $145.
Marketing defines a competitive price point of $140, aiming to sell 5,000 units.

Financial Targets and Profits

Initial costs for product launch estimated at 300,000,witharequiredreturnrateof20300,000, with a required return rate of 20% leading to a desired profit of 300,000,witharequiredreturnrateof2060,000.
Maximum allowable cost calculated as target cost:
- Total sales expected = 140∗5,000packs=140 * 5,000 packs = 140∗5,000packs=700,000
- To achieve a profit of 60,000,costsmusttotal≤60,000, costs must total ≤ 60,000,costsmusttotal≤640,000.
Therefore, the target cost per pack = 640,000/5,000packs=640,000 / 5,000 packs = 640,000/5,000packs=128.

Consequences of Exceeding Costs

If costs exceed $640,000, the project is deemed unsuccessful, as desired profit levels will not be met.
Ensuring production costs remain under target limit is crucial for profitability projections.

Relevant Costs

Relevant costs are future costs that influence short-term business decisions.
Cost behavior knowledge aids managers in decisions like outsourcing operational activities.
Relevant costs differ between alternatives, affecting choices, such as the price, sales tax, and insurance for a car purchase.

Irrelevant Costs

Irrelevant costs do not impact decision-making and remain constant across alternatives.
Sunk costs are past costs that cannot be changed and do not factor into future decisions, such as the purchase price of an old car.

Opportunity Costs

Opportunity cost is the benefit lost when choosing one option over another.
Example: Using a machine for one product means the alternative usage is sacrificed.

Non-Financial Information

Relevant non-financial information has traits similar to financial information and affects managerial decisions.
Qualitative factors can influence outcomes, such as community impact from plant closures or employee morale from layoffs.

Decision-Making Considerations

Managers must assess both quantitative and qualitative effects when making decisions.
Ignoring qualitative factors may lead to mistakes.
Short-term decisions include accepting special orders, pricing strategies, product discontinuation, product mix analysis, outsourcing, and further processing questions.

Incremental Analysis Approach

Relevant costs should be future-oriented and differ among alternatives.
Focus is on how operating income changes under alternative scenarios, excluding irrelevant information that may cause confusion.
Fixed and variable costs are analyzed separately due to their distinct behaviors.

Relevant Costs

Relevant costs are future costs that influence short-term business decisions.
Cost behavior knowledge aids managers in decisions like outsourcing operational activities.
Relevant costs differ between alternatives, affecting choices, such as the price, sales tax, and insurance for a car purchase.

Irrelevant Costs

Irrelevant costs do not impact decision-making and remain constant across alternatives.
Sunk costs are past costs that cannot be changed and do not factor into future decisions, such as the purchase price of an old car.

Opportunity Costs

Opportunity cost is the benefit lost when choosing one option over another.
Example: Using a machine for one product means the alternative usage is sacrificed.

Non-Financial Information

Relevant non-financial information has traits similar to financial information and affects managerial decisions.
Qualitative factors can influence outcomes, such as community impact from plant closures or employee morale from layoffs.

Decision-Making Considerations

Managers must assess both quantitative and qualitative effects when making decisions.
Ignoring qualitative factors may lead to mistakes.
Short-term decisions include accepting special orders, pricing strategies, product discontinuation, product mix analysis, outsourcing, and further processing questions.

Incremental Analysis Approach

Relevant costs should be future-oriented and differ among alternatives.
Focus is on how operating income changes under alternative scenarios, excluding irrelevant information that may cause confusion.
Fixed and variable costs are analyzed separately due to their distinct behaviors.

Relevant Costs

Relevant costs are future costs that influence short-term business decisions.
Cost behavior knowledge aids managers in decisions like outsourcing operational activities.
Relevant costs differ between alternatives, affecting choices, such as the price, sales tax, and insurance for a car purchase.

Irrelevant Costs

Irrelevant costs do not impact decision-making and remain constant across alternatives.
Sunk costs are past costs that cannot be changed and do not factor into future decisions, such as the purchase price of an old car.

Opportunity Costs

Opportunity cost is the benefit lost when choosing one option over another.
Example: Using a machine for one product means the alternative usage is sacrificed.

Non-Financial Information

Relevant non-financial information has traits similar to financial information and affects managerial decisions.
Qualitative factors can influence outcomes, such as community impact from plant closures or employee morale from layoffs.

Decision-Making Considerations

Managers must assess both quantitative and qualitative effects when making decisions.
Ignoring qualitative factors may lead to mistakes.
Short-term decisions include accepting special orders, pricing strategies, product discontinuation, product mix analysis, outsourcing, and further processing questions.

Incremental Analysis Approach

Relevant costs should be future-oriented and differ among alternatives.
Focus is on how operating income changes under alternative scenarios, excluding irrelevant information that may cause confusion.
Fixed and variable costs are analyzed separately due to their distinct behaviors.

Relevant Costs

Relevant costs are future costs that influence short-term business decisions.
Cost behavior knowledge aids managers in decisions like outsourcing operational activities.
Relevant costs differ between alternatives, affecting choices, such as the price, sales tax, and insurance for a car purchase.

Irrelevant Costs

Irrelevant costs do not impact decision-making and remain constant across alternatives.
Sunk costs are past costs that cannot be changed and do not factor into future decisions, such as the purchase price of an old car.

Opportunity Costs

Opportunity cost is the benefit lost when choosing one option over another.
Example: Using a machine for one product means the alternative usage is sacrificed.

Non-Financial Information

Relevant non-financial information has traits similar to financial information and affects managerial decisions.
Qualitative factors can influence outcomes, such as community impact from plant closures or employee morale from layoffs.

Decision-Making Considerations

Managers must assess both quantitative and qualitative effects when making decisions.
Ignoring qualitative factors may lead to mistakes.
Short-term decisions include accepting special orders, pricing strategies, product discontinuation, product mix analysis, outsourcing, and further processing questions.

Incremental Analysis Approach

Relevant costs should be future-oriented and differ among alternatives.
Focus is on how operating income changes under alternative scenarios, excluding irrelevant information that may cause confusion.
Fixed and variable costs are analyzed separately due to their distinct behaviors.

Relevant Costs

Relevant costs are future costs that influence short-term business decisions.
Cost behavior knowledge aids managers in decisions like outsourcing operational activities.
Relevant costs differ between alternatives, affecting choices, such as the price, sales tax, and insurance for a car purchase.

Irrelevant Costs

Irrelevant costs do not impact decision-making and remain constant across alternatives.
Sunk costs are past costs that cannot be changed and do not factor into future decisions, such as the purchase price of an old car.

Opportunity Costs

Opportunity cost is the benefit lost when choosing one option over another.
Example: Using a machine for one product means the alternative usage is sacrificed.

Non-Financial Information

Relevant non-financial information has traits similar to financial information and affects managerial decisions.
Qualitative factors can influence outcomes, such as community impact from plant closures or employee morale from layoffs.

Decision-Making Considerations

Managers must assess both quantitative and qualitative effects when making decisions.
Ignoring qualitative factors may lead to mistakes.
Short-term decisions include accepting special orders, pricing strategies, product discontinuation, product mix analysis, outsourcing, and further processing questions.

Incremental Analysis Approach

Relevant costs should be future-oriented and differ among alternatives.
Focus is on how operating income changes under alternative scenarios, excluding irrelevant information that may cause confusion.
Fixed and variable costs are analyzed separately due to their distinct behaviors.

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Description

Explore the concept of target costing in this module of Managerial Accounting. Learn how this pricing strategy differs from cost plus pricing and its implications on profit margins. Understand how to effectively apply target costing to improve your pricing strategies.