Question

If your goal in an organization was to ensure that sales revenue is maintained at a...

If your goal in an organization was to ensure that sales revenue is maintained at a minimum 50% more than the product cost at a the unit level, what product costing method would you be more incline to propose and why?

Homework Answers

Answer #1

As the goal is to ensure that the costs are atleast 50% less than the sales revenue. The recommended costing method would be Target costing.

Target costing: Target costing can be defined as a method of costing wherein a target cost for products are set and achieved based on a particular target.

In the above scenario, the target cost is 50% less than sales revenue.

Below is the process of target costing:

  • Establish selling price of the product.
  • calculate the target cost which is 50% less than the selling price.
  • perform functional cost analysis for all the components of costs.
  • Calculate the expected cost.
  • If the estimated cost is higher than the target cost, then repeat the cost analysis and try to reduce the cost through value engineering and other cost reduction techniques.
  • Decide whether to produce or cancel the product.
  • Manage production costs in order to attain the target cost.
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