2.2 Deriving a target cost Steps
1 Estimate a selling price for a new product that will enable a firm to capture a required share of the market.
2 Reduce this figure by the firm’s required level of profit. This could take into account the return required on any new investment and on working capital requirements or could involve a target margin on sales.
3 Produce a target cost figure for product designers to meet.
4 Reduce costs to provide a product that meets that target cost.
Illustration 5 – Targeting costs外语学习网
Katy Inc, a toy manufacturer, is about to launch a new type of bicycle on which it requires a Return on Investment of 30%.
Buildings and equipment needed for production are to cost $5,000,000.
Expected sales levels are $40,000 toys pa at a selling price of $67.50 per item costs are currently estimated to be $32 per unit.
Required:
What is the target cost for annual production?
Solution
Working$
Revenue(67.50×40,000)2,700,00
Target costs(balancing figure)(1,200,000)
Target return(30%×5,000,000)1,500,000
Test your understanding 7
LMN Ltd makes and sells two products, X and Y. Both products are manufactured through two consecutive processes – assembly and finishing. Raw material is input at the commencement of the assembly process. An ABC approach is used in the absorption of product specific conversion costs.
The following estimated information is available for the period ending 31 December 20x5:
Product XProduct Y
Production/sales (units)12,0007,200
Selling price per unit$75$90
Direct material cost per unit$20$20来自www.Examw.com
ABC variable conversion cost per unit
- assembly$20$28
- finishing$12$24
Product-specific fixed costs$170,000$90,000
Company fixed costs$50,000
LMN Ltd uses a minimum contribution/sales (C/S) ratio target of 25% when assessing the viability of a product. In addition, management wish to achieve an overall net profit margin of 12% on sales in this period in order to meet return on capital targets.
Explain how target costing may be used in achieving the required returns and suggest specific areas of investigation. |
发表于 2012-2-23 17:09:42
