Podcast
Questions and Answers
What is the primary goal of target costing when designing a product?
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?
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?
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?
What type of product is the example based on?
What does overengineering refer to in the context of product design?
What does overengineering refer to in the context of product design?
What was the proposed quantity of backpacks that the company expected to sell?
What was the proposed quantity of backpacks that the company expected to sell?
What investment amount was required to launch the new product line?
What investment amount was required to launch the new product line?
What was the selling price of the competitor's CDT pack?
What was the selling price of the competitor's CDT pack?
Which factor should a company focus on to avoid overengineering a product?
Which factor should a company focus on to avoid overengineering a product?
What is a target profit in the context of the new product line?
What is a target profit in the context of the new product line?
What is the primary difference between target costing and cost plus pricing?
What is the primary difference between target costing and cost plus pricing?
If a product's expected selling price is $60 and the desired target profit is $50, what is the target cost per unit?
If a product's expected selling price is $60 and the desired target profit is $50, what is the target cost per unit?
What concept is closely related to target costing in product design?
What concept is closely related to target costing in product design?
In target costing, what happens if the production cost exceeds the maximum allowable target cost?
In target costing, what happens if the production cost exceeds the maximum allowable target cost?
Which of the following statements correctly describes the approach of cost plus pricing?
Which of the following statements correctly describes the approach of cost plus pricing?
In target costing, the maximum allowable costs to produce a product are determined after the product is designed.
In target costing, the maximum allowable costs to produce a product are determined after the product is designed.
The concept of value engineering is unrelated to target costing.
The concept of value engineering is unrelated to target costing.
If the production cost exceeds $45, the company will achieve its target profit of $50 per unit.
If the production cost exceeds $45, the company will achieve its target profit of $50 per unit.
Cost plus pricing involves determining the selling price based on fixed production costs and a profit markup.
Cost plus pricing involves determining the selling price based on fixed production costs and a profit markup.
In the example given, the expected selling price of the product is $60, which corresponds to a target cost of $45.
In the example given, the expected selling price of the product is $60, which corresponds to a target cost of $45.
Describe the process of target costing and how it relates to product design.
Describe the process of target costing and how it relates to product design.
Explain the importance of setting a target profit when using target costing.
Explain the importance of setting a target profit when using target costing.
What is the main difference between target costing and cost-plus pricing?
What is the main difference between target costing and cost-plus pricing?
Why is value engineering important in the target costing process?
Why is value engineering important in the target costing process?
What consequences does a company face if its production costs exceed the target cost in target costing?
What consequences does a company face if its production costs exceed the target cost in target costing?
What does opportunity cost refer to when using a machine for production?
What does opportunity cost refer to when using a machine for production?
Why is it important for managers to consider qualitative factors in decision-making?
Why is it important for managers to consider qualitative factors in decision-making?
What is the focus of the incremental analysis approach in decision-making?
What is the focus of the incremental analysis approach in decision-making?
Which of the following is considered a relevant cost for decision-making?
Which of the following is considered a relevant cost for decision-making?
What impact does outsourcing typically have on a company?
What impact does outsourcing typically have on a company?
What characterizes relevant non-financial information in managerial decisions?
What characterizes relevant non-financial information in managerial decisions?
How can discount pricing for select customers negatively affect regular customers?
How can discount pricing for select customers negatively affect regular customers?
What distinguishes relevant costs from irrelevant costs in decision making?
What distinguishes relevant costs from irrelevant costs in decision making?
Which of the following is an example of a sunk cost?
Which of the following is an example of a sunk cost?
In what situation would opportunity cost be relevant for decision making?
In what situation would opportunity cost be relevant for decision making?
Why are past costs considered irrelevant in making future decisions?
Why are past costs considered irrelevant in making future decisions?
Which of the following would most likely be considered a relevant cost in deciding whether to buy a new car?
Which of the following would most likely be considered a relevant cost in deciding whether to buy a new car?
What is the primary role of a manager in understanding relevant costs for decision making?
What is the primary role of a manager in understanding relevant costs for decision making?
What would be classified as an irrelevant cost when considering whether to close a store?
What would be classified as an irrelevant cost when considering whether to close a store?
Which concept involves evaluating the cost of forgoing one option for another?
Which concept involves evaluating the cost of forgoing one option for another?
What defines opportunity cost in the context of using a machine for production?
What defines opportunity cost in the context of using a machine for production?
In decision-making, why is it essential for managers to consider qualitative factors?
In decision-making, why is it essential for managers to consider qualitative factors?
What is the primary focus of the incremental analysis approach?
What is the primary focus of the incremental analysis approach?
How do relevant non-financial information and relevant financial information compare?
How do relevant non-financial information and relevant financial information compare?
What potential issue might arise from outsourcing a product?
What potential issue might arise from outsourcing a product?
What is a critical distinction between fixed costs and variable costs in managerial analysis?
What is a critical distinction between fixed costs and variable costs in managerial analysis?
What is a likely consequence of discounting prices for select customers?
What is a likely consequence of discounting prices for select customers?
What defines relevant costs in a decision-making context?
What defines relevant costs in a decision-making context?
Why are sunk costs considered irrelevant in decision-making?
Why are sunk costs considered irrelevant in decision-making?
What is the best example of opportunity cost in a business decision?
What is the best example of opportunity cost in a business decision?
Which of the following best describes irrelevant costs?
Which of the following best describes irrelevant costs?
When considering whether to buy a new car, which of the following would be classified as a relevant cost?
When considering whether to buy a new car, which of the following would be classified as a relevant cost?
What kind of costs are specifically excluded from consideration when making short-term managerial decisions?
What kind of costs are specifically excluded from consideration when making short-term managerial decisions?
How do relevant costs differ from irrelevant costs in the context of business decisions?
How do relevant costs differ from irrelevant costs in the context of business decisions?
Which statement best captures the idea of opportunity cost?
Which statement best captures the idea of opportunity cost?
Relevant costs can only be incurred in the future.
Relevant costs can only be incurred in the future.
Opportunity costs are defined as the benefits received from the course of action chosen.
Opportunity costs are defined as the benefits received from the course of action chosen.
Sunk costs should be considered when making future business decisions.
Sunk costs should be considered when making future business decisions.
Irrelevant costs differ between alternatives and influence managerial decisions.
Irrelevant costs differ between alternatives and influence managerial decisions.
The CEO's salary is considered a relevant cost when deciding whether to close a store.
The CEO's salary is considered a relevant cost when deciding whether to close a store.
What are relevant costs and why are they critical for short-term business decisions?
What are relevant costs and why are they critical for short-term business decisions?
Explain the concept of sunk costs and their role in business decision-making.
Explain the concept of sunk costs and their role in business decision-making.
What is opportunity cost, and how can it impact managerial choices?
What is opportunity cost, and how can it impact managerial choices?
How do relevant costs differ between alternatives, and what implication does this have for decision-making?
How do relevant costs differ between alternatives, and what implication does this have for decision-making?
In what situations would a CEO's salary be considered an irrelevant cost in decision-making?
In what situations would a CEO's salary be considered an irrelevant cost in decision-making?
What are relevant costs and how do they influence short-term business decisions?
What are relevant costs and how do they influence short-term business decisions?
What is the opportunity cost, and why is it important for decision-making?
What is the opportunity cost, and why is it important for decision-making?
Explain how sunk costs differ from relevant costs in decision-making.
Explain how sunk costs differ from relevant costs in decision-making.
In what scenarios might a manager decide to outsource an operating activity?
In what scenarios might a manager decide to outsource an operating activity?
Why is it essential for managers to differentiate between relevant and irrelevant costs when making decisions?
Why is it essential for managers to differentiate between relevant and irrelevant costs when making decisions?
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.
