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CMA Final · Strategic Cost Management · Target Costing

Rohan Foods targets a total cost of Rs 500 per unit for a product with four functions. Function weights by customers: Taste 40%, Pack 30%, Shelf life 20%, Look 10%. Current costs per unit: Taste Rs 150, Pack Rs 220, Shelf life Rs 100, Look Rs 80 (total Rs 550). In value engineering, which function shows the largest cost reduction needed when its cost is brought to its weight-based allowable cost (weight x Rs 500)?

Pack needs the largest reduction, Rs 70. Allowable cost is weight times Rs 500, which is Rs 150 for Pack against its current Rs 220. Look is over by Rs 30, shelf life is on target, and Taste is under-spent by Rs 50.

  1. APack, Rs 70Correct
  2. BTaste, Rs 50
  3. CLook, Rs 30
  4. DShelf life, Rs 0

Explanation

Allowable: Taste 200, Pack 150, Shelf life 100, Look 50. Current minus allowable: Taste -50 (under), Pack +70, Shelf life 0, Look +30. Largest reduction is Pack at Rs 70. Total reductions 100 exceed gap of 50 as Taste is under-spent.

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