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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Strategic Cost & Performance Management

Case: Kaveri Auto Components Ltd, Pune, makes brake assemblies. Its design team fixes a selling price of ₹1,200 per unit based on market research and a required profit margin of ₹200 per unit, then challenges engineers to design and produce the unit within the resulting cost ceiling. Which cost management approach is Kaveri applying?

Kaveri is using target costing. The selling price is set from the market, the required profit is deducted to give an allowable cost of ₹1,000, and the product is designed to meet it. This is price-led, unlike cost-plus pricing, which adds margin to cost.

  1. ACost-plus pricing with full absorption costing
  2. BTarget costingCorrect
  3. CKaizen costing
  4. DActivity-based costing

Explanation

Target costing starts with the market price, deducts the required margin to get an allowable cost of ₹1,000 (1,200 - 200), and then designs the product to meet it. Cost-plus pricing works the other way, building price up from cost. Kaizen focuses on continuous improvement of existing production costs, not on a price-led design ceiling.

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