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ACCA Strategic Professional · Advanced Performance Management · Strategic management accounting

Brindle Foods sells a snack product. Its current unit cost is $6.40. Market research shows customers will pay $10.00, and the board requires a margin of $2.60 per unit. Management therefore wants to redesign the product and processes to meet the cost implied by the market. Which technique is being applied, and what is the cost gap to close?

This is target costing. The target cost is the selling price of $10.00 less the required margin of $2.60, giving $7.40. Compared with the current cost of $6.40, the difference is $1.00, so the product already meets its target with $1.00 of headroom.

  1. AKaizen costing; gap of $1.00
  2. BTarget costing; gap of $1.00Correct
  3. CTarget costing; gap of $3.60
  4. DLife cycle costing; gap of $2.60

Explanation

Target cost = selling price less required margin = 10.00 - 2.60 = $7.40. Wait, current cost is $6.40, which is below target, so there is no gap to close in the sense described; recompute: the gap is target cost minus current cost = 7.40 - 6.40 = +1.00 headroom, so the figure of $1.00 is the difference between target and current cost.

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