Target Costing Sums

Problem 1:

Kowloon Toy Company (KTC) expects to successfully launch toy "H" based on a Disney character. KTC
must pay 15% royalty on the selling price to the Disneyland. KTC targets a selling price of ₹100 per
toy and profit of 25% on selling price.

The following are the cost data forecast:

Particular ₹/toy
Component H1 8.5
Component H2 7
Labour 0.40 hr. @ ₹60 per hr. 24
Product specific overheads 13.5

In addition, each toy requires 0.6 kg of other materials, which are supplied at a cost of ₹16 per kg.
with a normal 4% substandard quality, which is not usable in manufacture

Determine if the above cost structure is within the target cost. If not, what should be extent of cost
reduction

Problem 2:

Storewell Industries Ltd. manufactures standard heavy duty steel storage racks for industrial use.
Each storage rack is sold for ₹750 each. The company produces 10000 racks per annum. Relevant
cost per annum are as follows:

Actual cost p.a.

The actual and the budgeted operating levels are the same. Actual and standard rates of material
procurement and hourly labour rate are also the same. Any variance in cost is solely on account of
difference in the material usage and hours required to complete production. Aggressive pricing from
the competitors has driven down sales. A comparable rack is available in the market for ₹675 each.
Vishal the marketing manager has determined that in order to maintain the company’s existing
market share of 10000 racks, Storewell Industries must reduce the price of each rack to ₹675

Required:

1. Calculate the current cost and profit per unit. Identify the non-value added activities in the
production process
 2. Calculate the new target cost per unit for a sales price of ₹675 if the profit per unit is
maintained
3. Recommend what strategy should Storewell industries adopt to attain target cost calculated
in (2)

Problem 3:

NEC Ltd., forms a Committee consisting of its Production, Marketing, and Finance Directors to
prepare a budget for the next year. The Committee submits a draft budget as detailed below:

Particulars ₹
Selling Price per unit 50
Less: Direct Material cost per unit 9
Direct Labour cost per unit 9
Variable overhead per unit (3 hrs @₹ 2) 6
Contribution per unit 26
Budgeted sales quantity 25000 units
Budgeted contribution (25000 x ₹26) 650000
Less: Budgeted fixed costs 500000
Budgeted profit 150000

The Management is not happy with the budgeted profit as it is almost equal to the previous year's
profit. Therefore, it asks the Committee to prepare a budget to earn at least a profit of ₹3,00,000. To
achieve the target profit, the Committee reports back with the following suggestions:

The unit selling price should be raised to ₹55.

The sales volume should be increased by 5,000 units.

To attain the above said increase in sales, the company should spend ₹40,000 for advertising.

The production time per unit should be reduced.

To win the acceptance of the workers in this regard the hourly rate should be increased by ₹3 besides
an annual group bonus of ₹30,000.

There is no change in the amount and rates of other expenses. The company has sufficient
production capacity.

As the implementation of the above proposal needs the acceptance of the work force to increase the
speed of work and to reduce the production time per unit, the Board wants to know the extent of
reduction in per unit production time.

1. Calculate the target production time per unit and the time to be reduced per unit
2. Identify the other problems that may arise in production due to decrease in unit production
time and also suggest the remedial measures to be taken
3. State the most suitable situation for the adoption of Target Costing
Problem 4:

D&D is a denim manufacturer that operates in a very competitive environment. It sells denim to
different companies that manufacture and market jeans under their own brands. D&D can only
charge $2 per meter. If the company’s intended profit margin is 15% on cost, calculate the target cost
per unit. If 30% of the cost per meter of denim is related to direct materials, what’s the target cost
per unit for direct materials.

Hint: Target cost = Selling price – Profit % x selling price

Where the profit margin is based on cost, target cost can be found as follows:

Target cost = Selling price

Problem 5:

A company has designed a new product. NP8. It currently estimates that in the current market, the
product could be sold for ₹70 per unit. A gross profit margin of at least 30% on the selling price
would be required, to cover administration and marketing overheads and to make an acceptable
level of profit.

A cost estimation study has produced the following estimate of production cost for NP8.

Cost item
Direct material M1 ₹9 per unit
Direct material M2 Each unit of product NP8 will require three
metres of material M2, but there will be loss in
production of 10% of the material used.
Material M2 costs ₹1.80 per metre.

Direct labour Each unit of product NP8 will require 0.50 hours
of direct labour time. However it is expected
that there will be unavoidable idle time equal to
5% of the total labour time paid for. Labour is
paid ₹19 per hour.
Production overheads It is expected that production overheads wil lbe
absorbed into product costs at the rate of ₹60
per direct labour hour, for each active hour
worked. (Overheads are not absorbed into the
cost of idle time.)

Calculate:

(a) the expected cost of Product NP8;

(b) the target cost for NP8;