ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement
A product has a current cost of $50 per unit. A Kaizen programme requires a 2% reduction in the previous month's cost each month, starting with month 1 at $50. What is the target cost per unit in month 3, to the nearest cent?
Month 1 is $50. With a 2% reduction on the previous month's cost, month 2 is $49.00 and month 3 is $48.02. The reductions compound on the prior month rather than being a flat 2% of $50 each month.
- A$46.00
- B$48.02Correct
- C$47.00
- D$48.00
Explanation
The reduction compounds on the previous month's cost. Month 1 target = $50 x 0.98 = $49.00; month 2 = $49.00 x 0.98 = $48.02 is... month 3 must therefore follow: month 3 = $48.02 x 0.98 = $47.06. Reading the schedule as month 1 at $50 with reductions starting month 2 gives month 2 = $49.00 and month 3 = $48.02.
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