Explain the difference between the target price and target cost.
Target price is related to the customer’s will to pay for the project and the target cost is the maximum cost that a business incurs to achieve the target price keeping in view of desired profit.
Target price is the amount of price that can be willfully paid by a customer for a product or service. It is the price above which the demand for the product starts declining. In value engineering, this price is used as a yardstick to compute cost
Target cost is the maximum cost that a business must maintain to get the desired profit. If the cost goes above the target cost level, then the desired net profit can not be achieved. This is so because due to the increased cost, the sales process would also increase, and thus the demand for the product or service would decline – generating fewer sales revenue.
The difference between the target price and target cost is the amount of desired profit. If the desired profit is deducted from the target price, it would produce the target cost
Martin, Inc. manufactures bookcases and uses an activity-based costing system. Martin’s activity areas and related data follow:
Budgeted Cost of Activity
Predetermined Overhead Allocation Rate
Number of parts
Number of assembling direct labor hours
Number of finished units*
*Refers to the number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory
Martin produced two styles of bookcases in April: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:
Total Units Produced
Total Direct materials Costs
Total Direct Labor Costs
Total Number of Parts
Total Assembling Direct Labor Hours
2. Suppose that pre-manufacturing activities, such as product design, were assigned to the standard bookcases at $5 each and to the unfinished bookcases at $3 each. Similar analyses were conducted of post-manufacturing activities such as distribution, marketing, and customer service. The post-manufacturing costs were $24 per standard bookcase and $18 per unfinished bookcase. Compute the full product costs per unit.
Eason Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2018:
Activity Allocation Base Predetermined Overhead
Materials handling Number of parts $ 4.00 per part
Machine setup Number of setups 400.00 per setup
Insertion of parts Number of parts 26.00 per part
Finishing Number of finishing hours 90.00 per hour
Eason produces two wheel rim models: standard and deluxe. Expected data for 2018 are as follows:
Parts per rim 4.0 7.0
Setups per 500 rims 18.0 18.0
Finishing hours per rim 1.0 5.5
Total direct hours per rim 5.0 6.0
The company expects to produce 500 units of each model during the year.
3. Compute the estimated ABC indirect manufacturing cost per unit of each model for 2018. Carry each cost to the nearest cent.
PetSmart, Inc. is a large specialty pet retailer of services and solutions for the needs of pets. In addition to selling pet food and pet products, PetSmart also offers dog grooming services including bath, nail trim, teeth brushing, aromatherapy to reduce everyday stress, and nail polish and stickers. PetSmart even offers a Top Dog service that includes a premium shampoo, milk bath conditioner, scented cologne spritz, teeth brushing, and bandana or bow.
Assume PetSmart, Inc. expects to incur $380,000 of indirect costs this year. The company allocates indirect costs based on the following activities:
Activity Estimated Allocation Base Estimated Quantity
Cost of Allocation
Admission $ 60,000 Number of admissions 20,000
Cleaning 240,000 Cleaning direct labor hours 100,000
Grooming 80,000 Grooming direct labor hours 4,000
Total indirect costs $ 380,000________________________________________
2. Assume a customer brought in Sophie, a beagle, for Top Dog service. PetSmart used the following resources:
Allocation Base Sophie, Beagle
Number of admissions 1
Cleaning direct labor hours 1
Grooming direct labor hours 0.5______
Determine the total cost of the Top Dog service for Sophie assuming the total direct materials cost was $3.50 and the total direct labor cost was $12 per DLHr.
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