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ACCA Applied Knowledge · Management Accounting · Alternative cost accounting principles

A company uses target costing for a new product. Which action would most directly help close a cost gap before production starts?

Value engineering is the most direct way, because it redesigns the product or its components to remove cost that customers do not value, closing the gap between estimated cost and target cost without changing the market-determined price.

  1. AValue engineering to remove unnecessary features from the designCorrect
  2. BRaising the selling price after launch to recover the shortfall
  3. CAbsorbing the gap into factory overheads over several periods
  4. DDelaying all marketing spend until the maturity stage

Explanation

Target costing starts from the market price and required margin, then reduces cost to reach the target. Value engineering redesigns the product to cut cost while keeping value to the customer. Raising price contradicts the market-set price premise.

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