Question 1

Orwell is about to introduce a new product and has established a target cost of $144 and a target margin on sales of 40 per cent. What is the target price?
A) $200
B) $225
C) $240
D) $280

Accepted Answer

To calculate the target price, we need to use the formula:

Target price = Target cost / (1 - Target margin)

Substituting the given values, we get:

Target price = $144 / (1 - 0.4)

Target price = $144 / 0.6

Target price = $240

Therefore, the target price for Orwell's new product is $240. The correct choice is C.

Question 2

Given the current design and resources, the cost that a new product could be manufactured for, including upstream and downstream costs, is known as:
A) target cost.
B) allowable cost.
C) current cost.
D) strategic cost.

Accepted Answer

Current cost refers to the cost at which a product can be manufactured given the existing design and resources, including all upstream and downstream costs.

Question 3

The following steps are required to implement business process re-engineering.
i. Establish goals
ii. Reorganise work flow
iii. Prepare a business process map
iv. Implementation
What is the correct order for these steps?
A) i, ii, iii and iv
B) i, iii, ii and iv
C) iii, i, ii and iv
D) ii, iii, i and iv

Accepted Answer

The correct order is to first prepare a business process map (iii), then establish goals (i), reorganize workflow (ii), and finally implement the changes (iv).

Question 4

The following four tasks take place in the concept known as target costing.
i. Value engineering
ii. Establish a target price
iii. Establish a target cost
iv. Establish a target profit
Which of the following correctly depicts the sequence of these tasks?
A) iii, i, iv and ii
B) ii, iv, iii and i
C) ii, iii, i and iv
D) iii, ii, i and iv

Accepted Answer

The correct sequence for target costing starts with establishing a target price (what the market will pay), then determining a target profit (desired profit), followed by establishing a target cost (target price minus target profit), and finally, value engineering is applied to achieve the target cost.

Question 5

If the target selling price is $120 and the target profit margin is a 40 per cent mark-up on cost, what is the target cost?
A) $48
B) $72
C) $85.70
D) $34.30

Accepted Answer

To find the target cost, we first need to find the cost that includes the 40% mark-up.

Let C be the cost. Then the selling price can be expressed as:

Selling Price = Cost + 40% of Cost
$120 = C + 0.4C
$120 = 1.4C
C = $85.70

Therefore, the target cost is $85.70.

Question 6

Which of the following do traditional costing systems ignore?
i. Production costs
ii. Design costs
iii. Development costs
iv. Marketing and customer service costs
A) i, ii and iii
B) i, ii and iv
C) ii, iii and iv
D) i, iii and iv

Accepted Answer

Traditional costing systems typically focus on allocating production costs to products and often ignore costs associated with design, development, and marketing/customer service, which are considered non-manufacturing overheads.

Question 7

A systematic approach in analysing the product and process design, with the aim of eliminating any non-value-added elements, to achieve the target cost is known as:
A) component level target costs.
B) value engineering.
C) strategic cost reduction.
D) cost reduction objective.

Accepted Answer

Value engineering is a systematic approach to reduce costs in the product and process design by eliminating non-value-added elements. It involves identifying functions of a product, understanding the cost drivers, and making decisions to reduce the costs without compromising on the quality or functionality. Option A is incorrect as component level target costs are a part of target costing methodology and not a systematic approach in analysing the product and process design. Option C is too broad and not specific to the process of eliminating non-value-added elements. Option D is incomplete and does not provide an explanation of the systematic approach.

Question 8

Which of the following statements is/are false?
i. Determining the cause of non-value-added activities requires cost driver analysis.
ii. Building activities into processes will quickly identify the causes of non-value-added activities.
iii. Identifying root cause cost drivers is sufficient to enable non-value-added activities to be eliminated.
A) i and ii
B) ii and iii
C) i and iii
D) All of the given answers

Accepted Answer

ii is false because building activities into processes may not quickly identify the causes of non-value-added activities; it's a more complex process involving analysis and understanding of the activities. iii is false because identifying root cause cost drivers, while important, is not alone sufficient to enable non-value-added activities to be eliminated; action must be taken based on that identification.

Question 9

Which of the following is a possible cause of a firm's reluctance to implement activity-based management (ABM)?
I Employee resistance to change.
Ii) Lack of understanding of the benefits of ABM.
Iii) Significant resources required.
Iv) Focus is on value-added activities.
A) i, ii and iii
B) i, ii and iv
C) ii, iii and iv
D) i, iii and iv

Accepted Answer

Employee resistance to change, lack of understanding of the benefits, and significant resources required are all possible reasons why a firm may be reluctant to implement activity-based management (ABM). The focus on value-added activities would actually be a reason to implement ABM, not a reason to be reluctant to implement it. Therefore, options B, C, and D are incorrect.

Question 10

Which of the following are key features of target costing?
i. Cross functionality
ii. Market price driven
iii. Focus on customer value
iv. Based on life cycle management
A) i, ii and iii
B) i, iii and iv
C) i, ii and iv
D) All of the given answers

Accepted Answer

Target costing involves cross-functional efforts, is driven by market prices, focuses on delivering customer value, and considers the entire life cycle of a product to manage costs effectively.

Question 11

Which of the following statements about re-engineering is/are true?
i. Re-engineering is the complete redesign of a process in an attempt to find new creative ways to accomplish objectivity.
ii. Re-engineering involves more of a 'giant leap' than the concept of activity-based management.
iii. Re-engineering may entail high risks.
A) i and ii
B) i and iii
C) ii and iii
D) All of the given answers

Accepted Answer

Re-engineering involves a fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical measures of performance. It indeed represents a significant change, often more substantial than the incremental steps seen in activity-based management, and carries high risks due to the scale of change it entails.

Question 12

Cartel Ltd has introduced a new product with a target price of $240 and a profit requirement of 33.3 per cent on sales. What is the target cost?
A) $120
B) $160
C) $180
D) $200

Accepted Answer

The answer of Cartel Ltd has introduced a new product...

Question 13

Beaufort Ltd is introducing a new range of products. It has established that the target selling prices of the three products are $120, $150 and $210. Beaufort requires a profit mark-up on cost of 33.3 per cent for all its products. What percentage of the target prices is the target cost in each case?
A) 50%
B) 60%
C) 66.7%
D) 75%

Accepted Answer

The answer of Beaufort Ltd is introducing a new range...

Question 14

When we consider the life cycle sequence of a product, the majority of costs for a typical product have been committed by the end of:
A) product planning.
B) design and development.
C) customer support.
D) production.

Accepted Answer

The majority of costs for a typical product have been committed by the end of design and development, as this is where the majority of the product is being created and finalized before production. While costs can still accumulate during the production phase, a significant portion of the product has already been established and designed, meaning the costs have already been set. Customer support is typically considered part of the post-production phase, and while it is important, it does not have as significant an impact on overall product cost as design and development. Product planning may involve some costs, but it is generally not as resource-intensive as design and development.

Question 15

Which of the following are considerations in determining a target selling price?
i. Customer expectations
ii. Competitors' actions
iii. Product cost
iv. Strategic objectives
A) i, ii and iii
B) ii, iii and iv
C) i, iii and iv
D) i, ii and iv

Accepted Answer

Customer expectations and competitors' actions are important factors to consider in determining the target selling price as they can influence the demand for the product. Product cost is also a crucial consideration as it determines the minimum price at which the product can be sold while still covering costs. Strategic objectives are also important as they can affect the pricing strategy chosen, such as whether to focus on market share or profitability. Therefore, options i, ii, and iv are all important considerations in determining a target selling price.

Question 16

In the process of target costing, where is the concentration of effort required to have the greatest impact on cost savings?
i. Product design
ii. Process design
iii. Production costs
iv. After sales costs
A) i and ii
B) ii and iii
C) i and iii
D) ii and iv

Accepted Answer

The greatest impact on cost savings in target costing is achieved through product design and process design, as decisions made during these stages significantly influence the overall costs.

Question 17

Carwell has introduced a new product with a target price of $150 and a target cost of $90. What is the target percentage margin on sales?
A) 20%
B) 33.3%
C) 40%
D) 50%

Accepted Answer

The target percentage margin on sales is calculated as (Target Price - Target Cost) / Target Price. So, ($150 - $90) / $150 = $60 / $150 = 0.4 or 40%.

Question 18

Which of the following activities are value-added activities?
i. Preventive maintenance
ii. Repairs to machinery
iii. Move work-in-process inventory between machines
iv. Process receivables
A) i and ii
B) iii and iv
C) i and iv
D) ii and iv

Accepted Answer

Value-added activities are those that increase the worth of a product or service to a customer. Preventive maintenance ensures machinery operates efficiently, directly impacting product quality and production efficiency, thus adding value. Processing receivables is crucial for cash flow and directly impacts a company's financial health, making it a value-added activity. Repairs to machinery and moving work-in-process inventory, on the other hand, are necessary but do not directly add value to the product from the customer's perspective.

Question 19

Which of the following are possible root-cause cost drivers?
i. Complexity
ii. Defects produced
iii. Plant layout
iv. Inadequate employee training
A) i, ii and iii
B) ii, iii and iv
C) i, iii and iv
D) All of the given answers

Accepted Answer

All the options listed (Complexity, Defects produced, Plant layout, Inadequate employee training) can be root-cause cost drivers in a business, as they all can lead to increased costs through inefficiencies, errors, or delays.

Question 20

Which of the following activities are non-value-added activities?
i. Inspect work in process
ii. Process sales orders
iii. Repair drilling machine
iv. Move raw material to the work station
A) i, iii and iv
B) i, ii and iv
C) i, ii and iii
D) ii, iii and iv

Accepted Answer

i. Inspecting work in process does not add value to the final product or service.
ii. Processing sales orders is a necessary activity to fulfill customer demands and provide value to them.
iii. Repairing a drilling machine is necessary to ensure the smooth functioning of the equipment and maintain the production process.
iv. Moving raw material to the work station is a necessary step to ensure the production process runs smoothly. However, it does not add value to the final product.

Quiz 16: Managing Costs and Quality

Orwell is about to introduce a new product and has established a target cost of $144 and a target margin on sales of 40 per cent. What is the target price?

Given the current design and resources, the cost that a new product could be manufactured for, including upstream and downstream costs, is known as:

The following steps are required to implement business process re-engineering. i. Establish goals ii. Reorganise work flow iii. Prepare a business process map iv. Implementation What is the correct order for these steps?

The following four tasks take place in the concept known as target costing. i. Value engineering ii. Establish a target price iii. Establish a target cost iv. Establish a target profit Which of the following correctly depicts the sequence of these tasks?

If the target selling price is $120 and the target profit margin is a 40 per cent mark-up on cost, what is the target cost?

Which of the following do traditional costing systems ignore? i. Production costs ii. Design costs iii. Development costs iv. Marketing and customer service costs

A systematic approach in analysing the product and process design, with the aim of eliminating any non-value-added elements, to achieve the target cost is known as:

Which of the following is a possible cause of a firm's reluctance to implement activity-based management (ABM) ? I Employee resistance to change. Ii) Lack of understanding of the benefits of ABM. Iii) Significant resources required. Iv) Focus is on value-added activities.

Which of the following are key features of target costing? i. Cross functionality ii. Market price driven iii. Focus on customer value iv. Based on life cycle management

Cartel Ltd has introduced a new product with a target price of $240 and a profit requirement of 33.3 per cent on sales. What is the target cost?

When we consider the life cycle sequence of a product, the majority of costs for a typical product have been committed by the end of:

Which of the following are considerations in determining a target selling price? i. Customer expectations ii. Competitors' actions iii. Product cost iv. Strategic objectives

In the process of target costing, where is the concentration of effort required to have the greatest impact on cost savings? i. Product design ii. Process design iii. Production costs iv. After sales costs

Carwell has introduced a new product with a target price of $150 and a target cost of $90. What is the target percentage margin on sales?

Which of the following activities are value-added activities? i. Preventive maintenance ii. Repairs to machinery iii. Move work-in-process inventory between machines iv. Process receivables

Which of the following are possible root-cause cost drivers? i. Complexity ii. Defects produced iii. Plant layout iv. Inadequate employee training

Which of the following activities are non-value-added activities? i. Inspect work in process ii. Process sales orders iii. Repair drilling machine iv. Move raw material to the work station