Exam 7: Target Costing, Managing Activities and Managing Capacity

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 is the estimated life-cycle operating profit for the first three years?

________ generally provides the lowest estimate of denominator-level capacity.

________ costs comprise the total costs that a customer incurs to acquire,use,maintain and dispose of a product or service.

To design costs out of products is a goal of:

Match each of the denominator-level capacity concepts (a-d)to the following descriptor items (1-10)by putting the appropriate letter(s)by each item: a.Theoretical capacity b.Practical capacity c.Normal capacity utilisation d.Budgeted capacity utilisation 1.Reduces theoretical capacity by considering unavoidable operating interruptions 2.Producing at full efficiency all the time 3.Measures capacity levels in terms of demand 4.Level of capacity utilisation that satisfies average customer demand over a period 5.Does not allow for plant maintenance 6.Engineering and human resource factors are important when estimating capacity 7.Level of capacity utilisation that managers expect for the current budget period 8.Ideal goal of capacity utilisation 9.Takes into account seasonal,cyclical,and trend factors 10.Measures capacity levels in terms of what a plant can supply _____________________________________________________________________________________________ _____________________________________________________________________________________________

Unused capacity:

If the capacity level chosen to calculate the budgeted fixed production overhead cost rate is more than the actual production,an unfavourable production-volume variance will result.

The higher the denominator level,the higher the budgeted fixed manufacturing cost rate per unit.

When there are significant differences between practical capacity and budgeted capacity utilisation,several companies classify the difference as planned ________ capacity.

Compare target costing and kaizen costing. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Answer the following questions using the information below: Perth TV currently sells flat screen televisions for $180.It has costs of $140.A competitor is bringing a new flat screen television to market that will sell for $150.Perth believes it must lower the price of its television sets to $150 to remain competitive.Marketing believes that the new price will cause sales to increase by 10%,even with the new competitor in the market.Perth's sales are currently 100 000 televisions per year. -What is the target cost if the company wants to maintain its same income level,and marketing is correct (rounded to the nearest cent)?

________ is the continuing reduction in the demand for a company's products that occurs when competitor prices are not met.

________ capacity utilisation is an average that provides no meaningful feedback to a manager for a particular year.

Answer the following questions using the information below: Potter Products has produced an electric coffee pot to complement its range of kitchen products.The new coffee pot can be sold at a target price of $46,and annual target sales volume for the coffee pot is 250 000.Potter has target operating profit of 20% of sales. -What is the target operating profit?

To manage activities well,management must identify how design choices lock in costs before the costs are incurred.

Answer the following questions using the information below: Davidson,Lindwall Associates is in the process of evaluating its new client services for the business systems consulting division. ∙ Distribution planning,a new service,incurred $250 000 in development costs. ∙ The direct costs of providing the service,which is all labour,averages $50 per hour. ∙ Other costs for this service are estimated at $300 000 per year. ∙ The current program for Distribution planning is expected to last for two years.At that time,expected new operating systems are likely to make the service non-viable. ∙ Customer service expenses average $250 per client,with each job lasting an average of 40 hours.The current staff expects to bill 15 000 hours for each of the two years the program is in effect.Billing averages $90 per hour. -What are the estimated life-cycle revenues?

When calculating activity cost rates,management should use:

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. -What is the target operating profit?

Market-based pricing starts with an assessment of market conditions,including customers' perceived value of an entity's output and how competitors are likely to price competing outputs.

Capacity costs: