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ACCA Strategic Professional · Advanced Performance Management · Performance improvement models and techniques

Halden Appliances uses target costing for a new blender. Target selling price is $80 and target margin is $20. The current cost is $68 per unit, made up of components $40, assembly $18 and other costs $10. Management ranks function value by customer survey and finds that the motor, which is 50% of customer-perceived value, currently accounts for $15 of the $68 cost. Applying value engineering so cost is proportional to customer-perceived value across the total target cost, which conclusion is correct?

The motor is under-costed by $15 relative to its value share, so reductions should focus on other functions. Target cost is $80 minus $20, which is $60. A 50% value share justifies $30 for the motor, versus $15 currently, while the other functions cost $53 against $30 allowed.

  1. AThe motor is over-costed by $15 relative to its value share
  2. BThe motor is under-costed by $15 relative to its value share, so it should be given a $30 budget
  3. CThe motor is under-costed by $15 relative to its value share, so cost reduction should concentrate on it
  4. DThe motor is under-costed by $15 relative to its value share, so cost reduction should concentrate on other functionsCorrect

Explanation

Target cost = 80 - 20 = $60. Motor's value share of 50% implies an allowable cost of $30. Current cost is $15, so it is under-costed by $15. Savings of $8 (68 - 60) must come from other functions, whose current cost is $53 against an allowable $30.

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