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Mock Test - Week 8 Target Costing - Question

SOFFA-WORLD Ltd, a manufacturer of office furniture, plans to introduce a new chair called the back-enhancer, using a target costing approach instead of the traditional cost-plus method. The management has set a selling price of £500 with a 25% margin, and various cost components have been outlined, including materials, labor, overheads, and royalties. The document also requests an analysis of the target costing process, its benefits, and calculations to identify any cost gaps for the new product.

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George Twumasi
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14 views2 pages

Mock Test - Week 8 Target Costing - Question

SOFFA-WORLD Ltd, a manufacturer of office furniture, plans to introduce a new chair called the back-enhancer, using a target costing approach instead of the traditional cost-plus method. The management has set a selling price of £500 with a 25% margin, and various cost components have been outlined, including materials, labor, overheads, and royalties. The document also requests an analysis of the target costing process, its benefits, and calculations to identify any cost gaps for the new product.

Uploaded by

George Twumasi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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TARGET COSTING MOCK TEST

You are the management Accountant for SOFFA-WORLD Ltd that was set up by
Ben Carson in 2015 in Scotland and specialises in the manufacture of office furniture
for workers with back problems. The office chairs are to offices through its large
network of outlets in the UK and via the company’s website. The company has been
making two types of chairs; the verti-assist and the back-stopper, since 2015.
However, in order to remain competitive, it plans to expand the product range.
SOFFA-WORLD Ltd intends to make a new chair called back - enhancer that
supports the back and neck. The company has always used the cost-plus approach
in determining selling prices. You have recently attended a seminar on costing
approaches and have recommended the use of target costing for the new chair. A
selling price of £500 has been agreed by the management so that they can compete
with a similar chair currently on the market. The management have also agreed to
apply a margin of 25%.
The following is the cost information for the back - enhancer (the new chair).

Bespoke fabric: This will be bought from an Indian supplier @ £80 per meter and
1.5 metres are needed for each back - enhancer chair, in addition to a delivery
charge of £5 per metre.

Specialist wood: This will be bought in batches of 1,000 from a country in Africa.
Each batch costs £21,000 in addition to £2,500 shipping costs. SOFFA-WORLD Ltd
has estimated that each batch of wood will make 250 of the back - enhancer chairs.

Assembly labour: these are highly skilled staff and are hard to recruit. The usual
rate per hour is £15. However, the company has agreed that these staff will be paid
£17 per hour plus 20% commission per hour to assemble the back - enhancer. It will
take an hour and a half to assemble a back - enhancer chair. However, it is
estimated that 5% of the time paid will be idle time.

Other components and overheads:

Each body - enhancer chair will require 3.5kg of other components. The other
components will be sourced from UK Suppliers at a cost of £15 per kg and there is a
standard waste of 5% of all other components purchased. In addition, there is a
product – specific production overhead cost of £15 per back - enhancer chair.

Royalties: SOFFA-WORLD must pay a royalty fee of 12% of the selling price to the
designing company.

Required

a) Describe the steps involved in the target costing process that SOFFA-WORLD
should undertake. (10 marks)
b) It has been argued that targeting costing offers a number of benefits. Explain the
benefits to SOFFA-WORLD of adopting a target costing approach at an early
stage in the introduction of the back - enhancer chairs. (10 marks)

c) Produce calculations indicating the expected cost of one unit of the back -
enhancer chair and determine any cost gap. (8 marks)

a) Where a cost gap is identified discuss steps SOFFA-WORLD could take to


reduce the gap (12 marks)

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