ACCA Applied Skills · Performance Management · Target costing
Which of the following is a typical method used to close a cost gap when applying target costing?
Value engineering is used to close the cost gap. It reviews the design, materials and processes to remove cost that customers do not value, while preserving the functions they want. Raising the price conflicts with target costing, because the market sets the price.
- ARaising the selling price until the required margin is achieved
- BValue engineering to remove unnecessary features and reduce component costsCorrect
- CIncreasing the absorption rate of fixed overheads
- DDelaying the launch until the market price rises
Explanation
Value engineering redesigns the product or process to cut costs while keeping the features customers value. Raising the price contradicts the premise that the price is set by the market. Changing overhead absorption does not reduce actual cost.
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