Question 1

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 determines the selling price of a product based on the desired profit margin, then works backwards to determine the maximum cost of production that will allow for that desired profit margin. This is a reverse approach from the traditional cost-based pricing model, which starts with the cost of production and adds a markup to determine the selling price.

Question 2

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

Even when using a cost-based approach, additional factors such as market demand, competition, and perceived value by the customer should be considered in determining a selling price.

Question 3

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

This statement accurately describes how to compute desired earnings using the return on assets pricing method.

Question 4

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 5

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

This is true for the return on assets pricing method.

Question 6

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

Accepted Answer

Committed costs are costs that are inherent to the production of a product or service and cannot be easily eliminated. These costs are typically incurred at the design stage of product development, and include things like machinery, equipment, and tooling. Therefore, committed costs are indeed engineered into a product or service at the design stage.

Question 7

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 engineers determine that a product can be produced for less than its target cost, it may still be beneficial to produce the product. The extra profit margin from producing the product at a lower cost can be reinvested in the company or used to offer competitive pricing to customers.

Question 8

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, as the return on assets pricing method aligns with the primary objective of a business to earn a minimum rate of return on assets.

Question 9

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

Accepted Answer

While management accountants play a role in cost analysis and control, they are not typically involved in the design of products. That responsibility typically falls to product designers, engineers, and other personnel in research and development departments.

Question 10

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

Accepted Answer

Return on assets pricing aims to set prices based on a desired return on investment, while gross margin pricing sets prices based on the difference between the cost of goods sold and the selling price. While both methods are used to determine prices, they have different objectives.

Question 11

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

Accepted Answer

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

Question 12

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

Accepted Answer

In target costing, the anticipated market price is considered as a starting point to determine the target cost of the product. The objective of target costing is to meet the market price and still earn a desired profit margin.

Question 13

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

Service-oriented businesses typically do not have physical products to sell and therefore do not have materials or parts costs. Pricing is generally determined by adding overhead costs (such as rent, utilities, and salaries) to the cost of labor and then marking up that total amount by a percentage to ensure profitability.

Question 14

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

Accepted Answer

Service-oriented businesses often take a different approach to pricing their services compared to product-oriented businesses as the nature of services is different from physical products. Service pricing strategies are typically based on factors such as time, expertise, and level of customization required.

Question 15

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 a price that potential customers would be willing to pay for a particular product or service. This helps businesses set prices that are competitive, yet profitable.

Question 16

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

Accepted Answer

The answer of When using traditional,cost-based pricing,the pricing decision is...

Question 17

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

Accepted Answer

The answer of Computing the target cost for a product...

Question 18

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

Accepted Answer

Cost-based pricing is dependent on the costs incurred by the company, hence the degree of trust in the cost base would determine the suitability of this method for pricing.

Question 19

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

Accepted Answer

The answer of A target cost is an anticipated cost...

Question 20

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 method of cost management in which desired profit is subtracted from a competitive price to determine the cost that a company should aim to achieve in the production of a product or service.

Quiz 26: Pricing Decisions, incltarget Costing and Transfer Pricing