Question 1

Target costing is an integral part of a performance measurement system.

Accepted Answer

False

Question 2

The objective of target costing's pricing analysis is to establish a price for the product or service that will maximize its profit potential.

Accepted Answer

True

Question 3

The profit target set in target costing is intended to provide sufficient funds over the life of the product to allow the firm to recover its development and production costs and provide a reasonable return on its investment in the product.

Accepted Answer

Target costing aims to ensure that a product is developed and produced at a cost that allows the firm to recover all associated costs while achieving a desired profit margin, ensuring a reasonable return on investment.

Question 4

The target cost is the sum of the target price and the desired profit.

Accepted Answer

The target cost is actually determined by subtracting the desired profit from the target price, not by adding them together.

Question 5

The difference between the current estimated cost of the product and its target cost is referred to as the cost gap.

Accepted Answer

The cost gap refers to the difference between the current estimated cost of producing a product and the target cost that the company aims to achieve to maintain profitability and competitiveness.

Question 6

Woodford Company has established a target price for a new product at $250. The company has determined that it must earn a desired profit of 30% on the product. The target cost for the product is $175.

Accepted Answer

The target cost is calculated by subtracting the desired profit from the target price. The desired profit is 30% of the target price, which is $75 (30% of $250). Subtracting this from the target price of $250 gives a target cost of $175.

Question 7

A job shop manufacturing setting features a continuous flow of homogenous units that are indistinguishable.

Accepted Answer

A job shop manufacturing setting is characterized by the production of small batches of customized products, which contrasts with a continuous flow of homogenous units typical of mass production or continuous manufacturing settings.

Question 8

All Tech Automotive uses a job order costing system to determine the cost of repair work completed for its customers. This system directly traces the cost of materials and direct labor to the specific repair jobs completed.

Accepted Answer

A job order costing system is designed to accumulate and assign the costs of labor, materials, and overhead to specific jobs or orders, making it suitable for businesses like All Tech Automotive that perform unique or custom work, such as repair jobs.

Question 9

All Tech Automotive uses a job order costing system to determine the cost of work completed for its customers. All Tech employs a single plant-wide overhead rate based on direct labor hours to apply overhead to individual repair jobs. For the current year, overhead is estimated to be $200,000 and direct labor hours are estimated to total 8,000. Tim Johnson's brake repair job required two direct labor hours to complete. All Tech will apply $50 of overhead to the Johnson repair job.

Accepted Answer

The plant-wide overhead rate is calculated as $200,000 estimated overhead / 8,000 estimated direct labor hours = $25 per direct labor hour. For Tim Johnson's brake repair job, which required two direct labor hours, the applied overhead would be 2 hours * $25/hour = $50.

Question 10

A continuous flow process, manufacturing environment takes advantage of the efficiencies of assembly line production while still accommodating product variety.

Accepted Answer

The answer of A continuous flow process, manufacturing environment takes...

Question 11

Committed costs are those that are "locked in" or determined by the design of the product and manufacturing process.

Accepted Answer

Committed costs are expenses that a company has already made a commitment to pay and are often difficult to adjust or eliminate in the short term. These costs are typically determined by decisions related to the design of a product and the manufacturing process, as these decisions dictate the resources and investments required.

Question 12

As a job shop adds more products and activities to its manufacturing environment, the use of departmental overhead application rates will improve its decision making.

Accepted Answer

Using departmental overhead application rates allows a job shop to more accurately assign overhead costs to specific products or activities based on the actual resources they consume. This leads to more precise costing and better-informed pricing, budgeting, and decision-making as the complexity of operations increases.

Question 13

In a process costing environment, the number of physical units of output completed in a given period is identical to the number of equivalent units of output attributed to that period.

Accepted Answer

In a process costing environment, the number of physical units of output completed may differ from the number of equivalent units of output because equivalent units account for partially completed units in terms of a fraction of a complete unit, reflecting the work done on them during the period.

Question 14

Equivalent unit computations are typically made for both raw material and conversion costs.

Accepted Answer

Equivalent unit computations are often made for both raw materials and conversion costs (labor and overhead) to accurately assign costs to partially completed units in a process costing system.

Question 15

Under the average method of process costing, costs from previous periods and the current period are combined into a single pool.

Accepted Answer

In the average method of process costing, costs from both previous periods and the current period are combined to calculate a single average cost per unit, which is then used to value units completed and units in process.

Question 16

The difference between the target price of a product and its target cost is:

Accepted Answer

The difference between the target price (what the company wants to sell the product for) and the target cost (how much the company aims to spend making the product) is the desired profit. This is the amount the company aims to earn above the cost of production.

Question 17

Young Corporation is in the design phase for a voice-activated remote control for home electronic devices. Its market analysis indicates that the planned device can be sold at a price of $150 per unit. The company has determined that a 30% profit on the product will allow it to recover the costs of development and production, and provide an adequate return on capital. Under these circumstances, the target cost for the remote control is:

Accepted Answer

The target cost is calculated as the selling price minus the desired profit. With a selling price of $150 and a desired profit of 30%, the profit per unit is $45 (30% of $150). Therefore, the target cost is $150 - $45 = $105.

Question 18

International Chemicals, Inc., is in the design phase of a new additive that will improve the adhesion of exterior house paint. The market for such additives is extremely competitive and International has determined that its selling price cannot exceed $20 per unit. At this price, the company has determined that a cost gap of $8 per unit exists. To proceed from the design to the attainment phase for this additive, International Chemicals will:

Accepted Answer

To close the cost gap and meet the market price, International Chemicals will likely need to redesign the product or its manufacturing process to reduce the actual cost to the target cost, rather than exceeding market price, abandoning the product, or reducing the target cost which is already determined by market conditions.

Question 19

The Wingo Corporation estimates that it can successfully market a new water toy at a price of $40 per unit. Its analysis also indicates an estimated actual cost to produce the new toy of $36 per unit. At this point, a cost gap of $8 exists. What rate of profit does Wingo require for this product?

Accepted Answer

The answer of The Wingo Corporation estimates that it can...

Question 20

Target cost is computed as follows:

Accepted Answer

Target cost is calculated by subtracting the required profit from the estimated price, which gives the maximum cost that can be incurred to achieve the desired profit.

Quiz 6: Planning in the Product Domain