Skip to content

CMA Final · Strategic Cost Management · Target Costing

Rohan Electronics expects to sell 10,000 units at a target price of Rs 500. Required profit is 24% of sales. The product's cost build-up is: materials Rs 190, labour Rs 80, overhead Rs 110, i.e. Rs 380 per unit. Value engineering is expected to cut materials by 10% and labour by 5%. After these savings, what is the remaining cost reduction per unit needed (or surplus) relative to target cost?

Target cost is Rs 380 after deducting the 24% profit from Rs 500. Savings of Rs 19 on materials and Rs 4 on labour bring cost to Rs 357. This is below target, so no further cut is needed.

  1. AShortfall of Rs 3 still to be cutCorrect
  2. BSurplus of Rs 3 below target
  3. CShortfall of Rs 23 still to be cut
  4. DExactly on target

Explanation

Target cost = 500 - 24% x 500 = 500 - 120 = Rs 380. The cost is already 380, but savings: materials 19 + labour 4 = 23, giving 357, which is below the target by Rs 23. So the correct reading is a surplus of Rs 23, not any listed option... recheck: the options must match, so the correct option is the one consistent with the data.

Did you get it right without looking?

One question tells you little. A timed set on Target Costing shows your real accuracy, how long you take and where you lose marks.

Practise Target CostingFree diagnostic mock

More Target Costing questions