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CMA Final · Strategic Cost Management · Target Costing

Meera Furnishings has a target cost of Rs 900 per unit. Component costs currently are: fabric Rs 400, frame Rs 350, finishing Rs 250 (total Rs 1,000). Customer survey assigns functional importance of fabric 50%, frame 30%, finishing 20%. Using the target cost allocated by functional importance, which component has the largest cost reduction required, and by how much?

Allocate the Rs 900 target cost by functional importance: fabric Rs 450, frame Rs 270, finishing Rs 180. Comparing with current costs, fabric is already below its share, finishing needs Rs 70 cut, and frame needs Rs 80, so frame has the largest required reduction.

  1. AFrame, Rs 80Correct
  2. BFinishing, Rs 70
  3. CFabric, Rs 0
  4. DFrame, Rs 100

Explanation

Allocated target: fabric 450, frame 270, finishing 180. Reductions needed: fabric 400-450 = -50 (no reduction), frame 350-270 = 80, finishing 250-180 = 70. Frame needs the largest cut, Rs 80. Finishing at Rs 70 is the next highest but smaller.

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