Deck 7: Target Costing, Managing Activities and Managing Capacity

Question 1

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 are target sales revenues?

A)$960 000
B)$2 000 000
C)$1 200 000
D)None of these answers are correct.

Answer 1

C

Question 2

The department usually in the best position to identify customers' needs is the:

A)production department.
B)distribution department.
C)sales and marketing department.
D)design department.

Answer 2

C

Question 3

The ________ price is the basis for calculating target cost per unit.

A)market
B)hybrid
C)selling
D)target

Answer 3

D

Question 4

Place the following steps for the implementation of target costing in order:
A = Derive a target cost
B = Develop a target price
C = Perform value engineering
D = Determine target operating profit

A)A B C D
B)B D A C
C)B A D C
D)A D B C

Question 5

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 cost for each interior door?

A)$48
B)$58
C)$45
D)$60

Question 6

Which of the following is NOT associated with target costing?

A)The mark-up component
B)All value-chain business functions
C)Cross-functional teams
D)Value engineering

Question 7

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 total target cost?

A)$2 484 000
B)$9 200 000
C)$1 000 000
D)$11 500 000

Question 8

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 cost?

A)$1 260 000
B)$960 000
C)$900 000
D)$1 008 000

Question 9

________ is a systematic evaluation of all aspects of the value chain,with the objective of reducing costs and achieving a quality level that satisfies customers.

A)Value engineering
B)Target costing
C)Market costing
D)Capacity costing

Question 10

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 are the target sales revenues?

A)$1 150 000
B)$11 500 000
C)$12 000 000
D)$1 200 000

Question 11

Which of the following is FALSE regarding target costing?

A)Customer input is essential to the target costing process
B)Improvements are implemented in small incremental amounts
C)A key goal is to minimise costs over the product's useful life
D)Input is requested from suppliers and distributors

Question 12

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.
The product strategy in which companies first determine the price at which they can sell a new product and then design a product that can be produced at a low enough cost to provide adequate operating profit is referred to as:

A)full costing.
B)cost-plus pricing.
C)target costing.
D)Kaizen costing.

Question 13

The two basic approaches for pricing are: competition-based and cost-based pricing.

Question 14

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?

A)$240 000
B)$180 000
C)$300 000
D)$192 000

Question 15

Target pricing:

A)estimates are based on customers' perceived value of the product.
B)is used for short-term pricing decisions.
C)is one form of cost-based pricing.
D)refers to the fact that relevant costs are all variable costs.

Question 16

Long-run pricing decisions include:

A)adjusting product mix and output volume in a competitive market.
B)pricing a one-time-only special order.
C)pricing a product in a major market in which there is some leeway in setting price.
D)None of the above.

Question 17

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?

A)$1 242 000
B)$1 200 000
C)$2 400 000
D)$2 300 000

Question 18

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)the focus of target pricing is to undercut the competition.
B)the target cost is established first,then the target price.
C)target costs are generally higher than current costs.
D)the target cost is the estimated long-run cost that enables a product or service to achieve a desired profit.

Question 19

What are the major influences that must be considered when pricing a new product? Discuss each briefly.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 20

Fixed costs are relevant for short-run pricing decisions because they cannot be changed.

Question 21

Value engineering may result in all of the following EXCEPT:

A)the evaluation of all business functions within the value chain.
B)changes in materials specifications.
C)increases in the quantity of non-value-added cost drivers.
D)improved product design.

Question 22

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)?

A)$140.00
B)$113.64
C)$123.34
D)$112.50

Question 23

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 the company wants to maintain its same profit level,and Marketing is correct (rounded to the nearest cent)?

A)$168.75
B)$170.46
C)$210.00
D)$185.00

Question 24

Sellers that set a target price have an idea of the amount of operating profit that they expect from setting that price.

Question 25

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 cost for each coffee pot?

A)$42.15
B)$36.80
C)$35.50
D)$46.00

Question 26

The first step in target pricing is to determine the target cost of the product.

Question 27

Which of the following is not a value engineering method of reducing costs?

A)Simplifying the design and thereby decreasing the number of component parts
B)Building efficiencies into value-added costs
C)Reducing the number of features offered
D)Redesigning alternative options over and over until the wishes of all cross-functional team members are accommodated

Question 28

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 change in operating profit if marketing is correct and only the sales price is changed?

A)$(1 100 000)
B)$1 100 000
C)$300 000
D)$(2 900 000)

Question 29

Hobart Boating Supplies currently sells motor boats for $16 000.It has costs of $13 000.A competitor is bringing a new motor boat to the market that will sell for $15 500.Management believes it must lower the price to $15 500 to compete in the market for motor boats.Marketing believes that the new price will cause sales to increase by 12.5%,even with a new competitor in the market.Hobart Boating Supplies' sales are currently 2000 motor boats per year.
Required:
a.What is the target cost if target operating profit is 25% of sales?
b.What is the change in operating profit if marketing is correct and only the sales price is changed?
c.What is the target cost if the company wants to maintain its same profit level,and marketing is correct?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 30

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.

Question 31

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

Question 32

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)$(165 000)
B)$45 000
C)$165 000
D)$(435 000)

Question 33

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 target operating profit is 25% of sales?

A)$45.00
B)$135.00
C)$112.50
D)$37.50

Question 34

Mt Safety Avionics currently sells radios for $1800 each.Each radio costs $1400 to make.A competitor is introducing a new radio that will sell for $1600.Mt Safety believes it must lower the price to $1600 to compete in the market for radios.However,its Marketing Department believes that the new price will cause sales to increase by 10%,even with a new competitor in the market.Mt Safety's sales are currently 1000 radios per year.
Required:
a.What is the target cost if target operating profit is 25% of sales?
b.What is the change in operating profit if marketing is correct and only the sales price is changed?
c.What is the target cost if the company wants to maintain its same profit level,and marketing is correct?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 35

To design costs out of products is a goal of:

A)target costing.
B)cost-plus pricing.
C)Kaizen costing.
D)peak-load costing.

Question 36

Target pricing is a form of cost-based pricing.

Question 37

What is the primary reason a firm would adopt target costing?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 38

A(n)________ represents something that one or more people within an organisation do to assist
In achieving its objective.

A)value
B)activity
C)capacity
D)supply chain

Question 39

Cost-plus pricing starts with what customers are willing to pay,and then adds a desired profit.

Question 40

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?

A)$56.25
B)$202.50
C)$168.75
D)$67.50

Question 41

Reverse engineering has the objective of reducing costs while still satisfying customer needs.

Question 42

Rework is an example of a value-added cost.

Question 43

We describe an activity as a value-added activity if its elimination by a manager would reduce the perceived value or utility (usefulness)that customers experience from using the relevant output.

Question 44

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

A)locked-in costs rising much faster initially than the incurred cost,but joining the incurred cost line at the completion of the value-chain functions.
B)locked-in costs rising much faster initially,but dropping to zero after the product is manufactured.
C)no differences unless the product is manufactured inefficiently.
D)the two cost lines running parallel until the end of the process,when they join.

Question 45

Designed-in or (locked-in)costs are costs that have not yet been incurred but will be incurred in the future (and cannot be avoided)because they are dictated by the design of the output.

Question 46

It is always clear which activities add value and which do not add value to a product.

Question 47

Which of the following can be included in cross-functional engineering teams?

A)Management accountants
B)Marketing managers
C)Suppliers
D)All of these answers are correct.

Question 48

A locked-in cost is a(n):

A)cost that can be changed in the short run.
B)cost that has not yet been incurred but,based on decisions that have already been made,will be incurred in the future.
C)opportunity cost that is fixed in the short run.
D)cost that has been incurred,but based on decisions that have already been made,will not be incurred in the future.

Question 49

Activity analysis is a fundamental tool in value engineering,the systematic evaluation of all aspects of the value chain with the objective of reducing costs and achieving a quality level that satisfies customers.

Question 50

Which of the following focuses on reducing costs during the manufacturing stage?

A)Kaizen costing
B)Life-cycle costing
C)Cost-plus pricing
D)Target costing

Question 51

Graphic analysis of incurred and locked-in costs provides several insights as to how the different concepts influence decisions.Which of the following statements is FALSE?

A)When and how costs are locked in are more important than when and how costs are incurred.
B)Costs are generally locked in before they are incurred.
C)Most costs are locked in during the manufacturing process.
D)After a product's design has been approved,costs are difficult to influence.

Question 52

Direct material costs are locked in when they are:

A)sold.
B)designed.
C)assembled.
D)delivered.

Question 53

Concerns about target costing include all the following EXCEPT:

A)development time may decrease.
B)cross-functional teams may add too many features.
C)excessive pressure is put on suppliers.
D)burnout of design engineers.

Question 54

Value engineering can reduce all of the following EXCEPT:

A)existing fixed manufacturing costs.
B)non-value-added costs.
C)rework-hours.
D)value-added costs.

Question 55

Locked-in costs have already been incurred.

Question 56

________ analysis is a fundamental tool in value engineering.

A)Activity
B)Value
C)Strategic
D)Hybrid

Question 57

For manufacturing firms,product costs are generally locked in during the manufacturing stage.

Question 58

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

A)during the marketing stage.
B)when they are incurred.
C)during the customer-service stage.
D)during the design stage.

Question 59

Value engineering has the objective of reducing costs while still satisfying customer needs.

Question 60

Cost accounting systems focus on when costs are:

A)incurred.
B)locked in.
C)used for setting prices for products and services.
D)paid for.

Question 61

Customers are sometimes willing to pay for non-value-added costs.

Question 62

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

A)Target
B)Customer life-cycle
C)Product
D)Manufacturing

Question 63

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

Question 64

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 year?

A)$18 000
B)$48 000
C)$20 000
D)$119 000

Question 65

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?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 66

Answer the following questions using the information below:
Waugh,Chapple,Border and Associates is in the process of evaluating its new client services for the business consulting division.
∙ Estate planning,a new service,incurred $600 000 in development costs and employee training.
∙ The direct costs of providing this service,which is all labour,averages $100 per hour.
∙ Other costs for this service are estimated at $2 000 000 per year.
∙ The current program for estate planning is expected to last for two years.At that time,a new law will be in place that will require new operating guidelines for the tax consulting.
∙ Customer service expenses average $400 per client,with each job lasting an average of 400 hours.The current staff expects to bill 40 000 hours for each of the two years the program is in effect.Billing averages $140 per hour.
What is the estimated life-cycle operating profit for the first year?

A)$(1 040 000)
B)$6 640 000
C)$(1 400 000)
D)$5 600 000

Question 67

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?

A)$310 000
B)$250 000
C)$280 000
D)$840 000

Question 68

What can an understanding of life-cycle costs lead to?

A)Cost-effective product designs that are easier to service
B)Less need for evaluation of the competition
C)Mutually beneficial relationships between buyers and sellers
D)Additional costs during the manufacturing cycle

Question 69

Life-cycle budgeting:

A)gives companies more insight into total costs when manufacturing costs consume the majority of the resources.
B)is most useful to companies that manufacture small items such as household plastics.
C)has little in common with target pricing.
D)helps companies estimate revenues over a multi-year horizon.

Question 70

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?

A)$2 700 000
B)$1 350 000
C)$3 000 000
D)$3 400 000

Question 71

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?

A)$840 000
B)$204 000
C)$174 000
D)$636 000

Question 72

In target costing,what are at least two techniques used to achieve target-costing goals?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 73

Answer the following questions using the information below:
Waugh,Chapple,Border and Associates is in the process of evaluating its new client services for the business consulting division.
∙ Estate planning,a new service,incurred $600 000 in development costs and employee training.
∙ The direct costs of providing this service,which is all labour,averages $100 per hour.
∙ Other costs for this service are estimated at $2 000 000 per year.
∙ The current program for estate planning is expected to last for two years.At that time,a new law will be in place that will require new operating guidelines for the tax consulting.
∙ Customer service expenses average $400 per client,with each job lasting an average of 400 hours.The current staff expects to bill 40 000 hours for each of the two years the program is in effect.Billing averages $140 per hour.
What are the estimated life-cycle revenues?

A)$22 400 000
B)$6 400 000
C)$11 200 000
D)$8 000 000

Question 74

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.

Question 75

________ costing tracks and accumulates business function costs of the value chain attributable to each product from initial R&D to final customer service and support.

A)Product
B)Life-cycle
C)Target
D)Process

Question 76

In ________ budgeting,managers estimate the revenues and business function costs of the value chain attributable to each product from its initial R&D to its final customer service and support.

A)product life-cycle
B)target
C)value
D)capacity

Question 77

Answer the following questions using the information below:
Waugh,Chapple,Border and Associates is in the process of evaluating its new client services for the business consulting division.
∙ Estate planning,a new service,incurred $600 000 in development costs and employee training.
∙ The direct costs of providing this service,which is all labour,averages $100 per hour.
∙ Other costs for this service are estimated at $2 000 000 per year.
∙ The current program for estate planning is expected to last for two years.At that time,a new law will be in place that will require new operating guidelines for the tax consulting.
∙ Customer service expenses average $400 per client,with each job lasting an average of 400 hours.The current staff expects to bill 40 000 hours for each of the two years the program is in effect.Billing averages $140 per hour.
What is the estimated life-cycle operating profit for the first two years?

A)$(1 480 000)
B)$11 200 000
C)$(1 400 000)
D)$3 200 000

Question 78

Most of a product's life-cycle costs are locked in by decisions made during the ________ business function of the value chain.

A)marketing
B)customer-service
C)design
D)manufacturing

Question 79

Compare target costing and kaizen costing.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 80

Life-cycle budgeting and life-cycle costing help highlight:

A)large ordering costs due to the great number of component parts used.
B)an increase in customer-service costs due to using inferior materials.
C)an increase in annual operating profit resulting from the new product.
D)high production costs caused by a complex design.