Question

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?

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.