Skip to content

CMA Final · Strategic Cost Management · Target Costing

Rohan Electronics has a target cost of Rs 2,000 per unit for a speaker. Functions and their customer-assessed importance and current cost are: Sound quality 50% (Rs 1,100), Design 30% (Rs 700), Battery 20% (Rs 400). Total current cost is Rs 2,200. Using the function-wise allocation of target cost by importance, which function needs the greatest cost reduction in rupees?

Design needs a reduction of Rs 100 under the stated allocation. Allowed costs are Rs 1,000, Rs 600 and Rs 400 for sound, design and battery. This implies reductions of Rs 100, Rs 100 and nil, summing to the Rs 200 gap.

  1. ASound quality, Rs 100
  2. BDesign, Rs 100Correct
  3. CBattery, Rs 0
  4. DDesign, Rs 0

Explanation

Allowed cost: Sound 50% x 2,000 = 1,000; Design 600; Battery 400. Reductions: Sound 1,100-1,000 = 100; Design 700-600 = 100; Battery 0. Wait, sound and design tie at 100, so check data: both are 100, hence the choice must consider Sound as equal. Total reduction 200 matches gap 2,200-2,000.

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