Question 1

Target costing identifies a competitive price and then subtracts the desired profit to determine a target cost.

Accepted Answer

This statement is true. Target costing is a strategy used by companies to determine the maximum amount they can spend on a product while still achieving a desired profit margin, based on the competitive price in the marketplace. It begins with identifying a target selling price, and then subtracts the desired profit margin to arrive at a target cost. This helps companies to focus on cost control and efficiency in their product design, manufacturing, and supply chain processes, in order to meet their target cost and profit goals.

Question 2

Return on assets pricing has the same objective as gross margin pricing for the price determination process.

Accepted Answer

Return on assets pricing focuses on maximizing the return on investment for the company, while gross margin pricing aims to cover the cost of goods and generate a profit margin. They have different objectives and approaches to price determination.

Question 3

Committed costs are engineered into a product or service at the design stage of product development.

Accepted Answer

Committed costs are those costs that are difficult or impossible to change in the short term. They are fixed costs that are incurred during the design and development phase of a product or service, and are therefore engineered into it from the beginning. Examples of committed costs include expenses related to research and development, design, tooling, and equipment.

Question 4

Target costing is a variation of cost-based pricing models that reverses the normal procedure for a cost-based pricing model.

Accepted Answer

Target costing starts with a target price that is set based on analysis of the market and then calculates the maximum allowable cost to achieve that target price, whereas a traditional cost-based pricing model starts with the cost of producing a product and adds a markup to determine the selling price.

Question 5

Because a business should have as its primary objective the earning of a minimum rate of return on assets,the return on assets pricing method has a great deal of appeal and support.

Accepted Answer

The statement is true. The return on assets pricing method helps a business to earn a minimum rate of return on its assets, which is a primary objective of any business. Therefore, the method has a great deal of appeal and support.

Question 6

Target costing identifies a competitive price and then adds the desired profit to determine a target cost.

Accepted Answer

Target costing starts with identifying a competitive price in the market and then subtracts the desired profit margin to determine the target cost, not the other way around.

Question 7

A company will choose a cost-based pricing method based on the degree of trust it has in the cost base.

Accepted Answer

In a cost-based pricing method, the price is based on the cost of producing the product or offering the service. The level of trust the company has in its cost base will determine if it chooses this method or not. For example, if the company has accurate and reliable cost data, it may have a higher level of trust in its cost base, and therefore choose a cost-based pricing method.

Question 8

A target price is an estimate of a price for a product or service that potential customers will be willing to pay.

Accepted Answer

A target price is indeed an estimate of what customers are willing to pay for a product or service, based on market research and analysis of consumer behavior and preference.

Question 9

If engineers determine that a product can be produced for less than its target cost,then production of the product should not be undertaken.

Accepted Answer

If a product can be produced for less than its target cost, production should still be undertaken as the lower production cost could increase profit margins. However, the engineers should also conduct further analysis to ensure the quality and functionality of the product are not compromised by reducing production costs.

Question 10

When using a cost-based approach,once the cost of a good or service has been determined,additional factors need not be considered in establishing a selling price.

Accepted Answer

While cost is an important factor to consider when establishing a selling price, additional factors such as competition, market demand, and consumer behavior should also be taken into account to ensure a competitive and profitable price. Failure to consider these factors could result in underpricing or overpricing a product, which can negatively impact sales and profitability.

Question 11

Computing the target cost for a product is the first step in target costing.

Accepted Answer

The first step in target costing is to determine the target price that customers are willing to pay, not the target cost.

Question 12

For the return on assets pricing method,the desired rate of return on assets per unit is added to the total costs and expenses per unit to determine the selling price.

Accepted Answer

The return on assets pricing method adds the desired rate of return on assets per unit to the total costs and expenses per unit to determine the selling price.

Question 13

A target cost is an anticipated cost that should be achieved at a midpoint in the product's life cycle.

Accepted Answer

A target cost is the estimated cost that a company aims to achieve in order to ensure profitability, typically set before production begins, not at a midpoint in the product's life cycle.

Question 14

Service-oriented businesses take the same approach to pricing their "product" as product-oriented businesses.

Accepted Answer

Service-oriented businesses focus on the value they provide to the customer, and in most cases, their pricing strategy includes hourly rates, project-based fees, or monthly retainers. Product-oriented businesses, on the other hand, usually have a cost-plus pricing method, where they calculate the cost of production and add a markup to determine the final price. Therefore, the approach to pricing is different for these two types of businesses.

Question 15

Management accountants are directly involved in designing products that meet target costs.

Accepted Answer

While management accountants may provide input and analysis regarding product costs, the design of products is typically the responsibility of product engineers or designers.

Question 16

For the return on assets pricing method,desired earnings are computed by dividing asset costs by projected units to be produced and then multiplying by the desired rate of return on assets.

Accepted Answer

The statement accurately describes how to calculate desired earnings using the return on assets pricing method.

Question 17

When using traditional,cost-based pricing,the pricing decision is made before products have been put into production.

Accepted Answer

Traditional cost-based pricing involves determining the cost of production first and then adding a markup to set the price, which means the pricing decision is made after the product costs are known.

Question 18

For service-oriented businesses,pricing is determined using cost-based approaches that add the cost of overhead to materials,parts,and labor via markup percentages.

Accepted Answer

Cost-based pricing is commonly used by service-oriented businesses, where overhead costs are added to materials, parts, and labor to determine the final price. This is done using markup percentages that vary depending on the industry and competitive factors.

Question 19

In gross margin pricing,the markup percentage is based on total production costs.

Accepted Answer

The answer of In gross margin pricing,the markup percentage is...

Question 20

Anticipated market price is taken as a given in target costing.

Accepted Answer

Anticipated market price is a key driver in target costing, and is used to determine the allowable cost to achieve desired profit margins.

Quiz 26: Pricing Decisions,incltarget Costing and Transfer Pricing