ACCA Applied Skills · Performance Management · Target costing
Which of the following is a key difference between target costing and traditional cost-plus pricing?
Target costing begins with the price the market will accept, deducts the required profit margin to find the allowable cost, and then works to close any gap. Cost-plus works in the opposite direction, starting from cost and adding a mark-up to get the price.
- ATarget costing starts from the market price and derives the allowable cost, whereas cost-plus starts from cost and adds a marginCorrect
- BTarget costing is applied only after a product has reached the decline stage of its life cycle
- CTarget costing ignores the required profit margin of the business
- DTarget costing derives the selling price by adding a mark-up to the full production cost
Explanation
Target costing works backwards: target cost = market price less required profit. Cost-plus works forwards from cost to price. The other options misdescribe when it is used, ignore profit, or describe cost-plus.
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