ACCA Applied Skills · Performance Management · Target costing
A firm has a target cost gap of $4 per unit on a product with a $30 price. Which action would be inconsistent with the target costing approach to closing the gap?
Raising the price to $34 regardless of the market is inconsistent. Target costing treats the market price as fixed and closes the gap by reducing costs through redesign, supplier involvement, standardisation and removing unvalued features.
- ARaising the price to $34 without regard to the marketCorrect
- BInvolving suppliers in redesigning components
- CReducing product features customers do not value
- DStandardising components with other products
Explanation
Target costing takes the market price as given and works backwards to cost, so the gap is closed by cutting cost, not by raising price above what the market accepts. The other options are standard cost-reduction methods.
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