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ACCA Applied Knowledge · Management Accounting · Alternative cost accounting principles

Which of the following best describes target costing?

Target costing deducts the required profit margin from a market-determined selling price to give the maximum allowable cost. It works backwards from the market price, unlike cost-plus pricing, which builds up from cost and then adds a mark-up to reach the selling price.

  1. ASetting the selling price by adding a fixed mark-up to the full production cost
  2. BDeducting a required profit margin from a market-determined selling price to arrive at the maximum allowable costCorrect
  3. CAccumulating all costs of a product from design to disposal and dividing by total units
  4. DCharging overheads to products on the basis of the activities that cause them

Explanation

Target costing starts with the price the market will bear, subtracts the required profit margin, and the result is the target cost. Option A describes cost-plus pricing, which works in the opposite direction. Option C describes life cycle costing, and D describes activity based costing.

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