Exam 7: Target Costing, Managing Activities and Managing Capacity

Many companies combine value engineering with kaizen,or continuous improvement,methods that seek to reduce the time it takes to do a task and to eliminate waste during production and delivery of outputs.

Managers frequently ________ their organisation's output cost structure against those of competitors.

________ is the level of capacity utilisation that satisfies average customer demand over a period that includes seasonal,cyclical and trend factors.

In some industries,such as legal and consulting,most costs are locked in:

Capacity costs arise in non-production parts of the value chain.

Managers cannot reduce the costs of capacity easily or quickly because they are fixed.

Explain the difference between locked-in costs and costs incurred.Which of these types of costs does a traditional accounting system emphasise? At which stage of the value chain are most costs locked in? At which stage of the value chain are most costs incurred? What implication does this have for good cost management? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Normal capacity utilisation:

Estimating capacity costs is unique to manufacturing and it is not applicable to non-production entities.

Answer the following questions using the information below: Elliott Manufacturing has decided to produce a new interior door to complement its exterior door line.The new door is expected to sell for $60 each,and the annual target sales volume for the doors is 20 000.Elliott has target operating profit of 20% of sales. -When target costing and target pricing are used together:

A graph comparing locked-in costs with incurred costs will have:

Answer the following questions using the information below: Ace Books Company currently sells eBook readers for $270.It has costs of $210.A competitor is bringing a new eBook reader to market that will sell for $225.Management believes it must lower the price to $225 to compete in the market for eBook readers.Marketing believes that the new price will cause sales to increase by 10%,even with a new competitor in the market.Ace's sales are currently 10 000 eBook readers per year. -What is the change in operating profit if Marketing is correct and only the sales price is changed?

A locked-in cost is a(n):

Target operating profit per unit is the operating profit that a seller aims to earn per unit of output sold.

Cost accounting systems focus on when costs are:

Answer the following questions using the information below: Snowy River Transformers is in the process of evaluating a new product using the following information: ∙ A new transformer has two production runs each year,each with $10 000 in set-up costs. ∙ The new transformer incurred $30 000 in development costs and is expected to be produced over the next three years. ∙ Direct costs of producing the transformers are $40 000 per run of 5000 transformers. ∙ Indirect manufacturing costs charged to each run are $45 000. ∙ Destination charges for each transformer average $1.00. ∙ Customer service expenses average $0.20 per transformer. ∙ The transformers are selling for $25 the first year and will increase by $3 each year thereafter. ∙ Sales units equal production units each year. -What are estimated life-cycle revenues?

Many companies use life-cycle budgeting to determine target prices.

Using budgeted capacity to set selling prices:

Budgeted capacity utilisation can be more reliably estimated than normal capacity utilisation.

Answer the following questions using the information below: Ace Books Company currently sells eBook readers for $270.It has costs of $210.A competitor is bringing a new eBook reader to market that will sell for $225.Management believes it must lower the price to $225 to compete in the market for eBook readers.Marketing believes that the new price will cause sales to increase by 10%,even with a new competitor in the market.Ace's sales are currently 10 000 eBook readers per year. -What is the target cost if operating profit is 25% of sales?