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CMA Final · Strategic Cost Management · Target Costing

Mehta Electronics is designing a smart speaker with a target cost of Rs 2,400. Value engineering analysis of its functions shows: Sound quality is 50% of customer value, Connectivity 30%, and Design 20%. The current cost of the functions is Sound Rs 1,100, Connectivity Rs 900, Design Rs 400 (total Rs 2,400, no gap). Which statement correctly reflects the cost-value comparison?

Connectivity is over-costed. Its cost share is 900 out of 2,400, or 37.5%, while customers assign it only 30% of value. Sound and Design have cost shares of 45.8% and 16.7%, below their value shares of 50% and 20%, so the total matching target does not matter.

  1. AConnectivity is over-costed relative to its value, since its cost share of 37.5% exceeds its value share of 30%Correct
  2. BSound quality is over-costed, since its cost share exceeds Design's
  3. CDesign is over-costed, since its cost share of 16.7% is below its value share
  4. DAll functions are properly costed because the total equals the target

Explanation

Cost shares: Sound 1,100/2,400 = 45.8%, Connectivity 900/2,400 = 37.5%, Design 400/2,400 = 16.7%. Value shares: 50%, 30%, 20%. Only Connectivity has cost share above value share (37.5 > 30), so it is over-costed. Sound and Design are under-costed relative to value.

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