1. The target cost of a product a. includes product costs but not period costs.

Question

1. The target cost of a product

a.   includes product costs but not period costs.

b.   is determined before the target price is established.

c.   is the difference between the target price and the desired profit.

d.   is determined by the target audience.

2.   In the cost-plus pricing approach, the markup percentage is computed by dividing the

a.   desired ROI/unit by variable cost/unit.

b.   desired ROI/unit by total unit cost.

c.   total unit cost by desired ROI/unit.

d.   selling price/unit by desired ROI/unit.

3.   All of the following are steps in the time-and-material pricing approach except calculating the

a.   labor charge.
b.   material loading charge.

c.   manufacturing overhead charge.

d.   charges for a particular job.

4.   The total contribution margin to a company in the market-based transfer price approach is

a.   greater than in the cost-based approach.

b.   less than in the cost-based approach.

c.   the same as in the cost-based approach.
d.   either greater than or less than in the cost-based approach.

5.   Absorption-cost pricing

a.   includes all variable costs in the cost base.

b.   excludes fixed manufacturing overhead from the cost base.

c.   provides the data needed for pricing special orders.

d.   uses a markup percentage that covers the desired ROI and the selling and administrative expenses.

Explanation / Answer

Part 1)

Is the difference between the target price and the desired profit (which is Option C)

________

Details Provided Below:

Option A is incorrect because target cost includes both period and product costs incurred in the manufacturing of the product.

Option B is incorrect because target cost is determined after the target selling price has been established by the company.

Option D is incorrect because target selling price is determined by the target audience and not the target cost. Target cost is calculated by subtracting the desired profit from the target selling price.

_____________

Part 2)

Desired ROI/unit by total unit cost (which is Option B)

________

Details Provided Below:

Under cost-plus pricing, the target selling price is computed with the use of following formula:

Target Selling Price = Cost + (Markup Percentage*Cost)

Markup percentage is calculated in reference to the return on investment desired by the company on that particular product. Therefore, the formula that is used for calculating the mark-up percentage requires the use of desired ROI and total cost per unit. It is expressed as: Desired ROI Per Unit/Total Cost Per Unit

_____________

Part 3)

Manufacturing overhead charge (which is Option C)

________

Details Provided Below:

Under time-and-material pricing approach, the rates are set for labor (time) and material. Based on these rates, the rate for a particular job gets calculated. The calculation of labor rate requires the use of direct labor time and related employee costs. Cost of direct materials would include the costs associated with the cost of procuring (which would include material loading charges) and holding materials.

_____________

Part 4)

The same as in the cost-based approach (which is Option C)

________

Details Provided Below:

Under, cost-based approach, the transfer price is set on the basis of cost incurred by the producing division. Under market-based transfer price approach, the transfer price is set with reference to the prevailing market prices of similar competing products. The selling divison charges the market price and the buying division pays the market price. In both the methods, the total contribution to the company as a whole would remain the same.

_____________

Part 5)

Uses a markup percentage that covers the desired ROI and the selling and administrative expenses (which is Option D)

________

Details Provided Below:

Under absorption-cost pricing, the target selling price is computed with the use of following formula:

Target Selling Price = Manufacturing Cost Per Unit + (Markup Percentage*Manufacturing Cost Per Unit)

Markup percentage is calculated with the use of formula given below:

Markup Percentage = (Desired ROI Per Unit + Selling and Administrative Expenses Per Unit)/Manufacturing Cost Per Unit

Under this approach, manufacturing cost is used as the cost basis and covers selling and administrative expenses plus desired return on investment with the help of a markup percentage as demonstrated by the formula provided above.

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