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ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement

Which of the following is a typical feature of target costing, as opposed to Kaizen costing?

Target costing starts with the market price, deducts the required profit to find the allowable cost, and then aims to close any cost gap during design and development. Kaizen costing instead seeks incremental savings after production has begun.

  1. AIt starts from the market-determined price and works back to an allowable cost during product designCorrect
  2. BIt focuses on small cost savings in the production phase of established products
  3. CIt sets cost targets by adding a fixed mark-up to historic cost
  4. DIt is applied only after the product has been launched

Explanation

Target costing begins with the price customers will pay, deducts the required profit to give a target cost, and then seeks to close any gap at the design and planning stage. Kaizen costing is post-launch and incremental. Cost-plus pricing builds up from historic cost.

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