Cima P2 Exam Question No 20

Question No 20:

Explain how JYT could use Target Costing

Target Costing is a system that is used when the company is unable to dictate the selling price of its products and (like JYT) is forced to accept the market price of the item it is planning to market. Once the specification of the product has been completed, then the company determines the price that the market is prepared to pay for its product. This may be discovered by market research or by considering the prices of similar items that are already available. The company then subtracts its profit target from this price to determine its cost target. If the expected product costs already meet the target cost over the life cycle of the product, taking account of any cost reductions that may occur, for example due to the benefits of the learning and experience curves, then production commences. However, it is more likely that at this initial stage the expected product costs exceed the target costs and as a result major product / process changes are made in order to achieve the target cost. If it is not possible to achieve the target cost by making these changes then the product is abandoned.

Cima P2 Exam Question No 19

Question No 19:

Explain the likely changes that will occur in the unit selling prices AND in the unit production costs, compared to the preceding stage.

Unit selling prices
These are likely to be reducing for a number of reasons:
The product will become less unique as competitors use reverse engineering to introduce their versions of the product
PT may wish to discourage competitors from entering the market by lowering the price and thereby lowering the unit profitability
The price needs to be lowered so that the product becomes attractive to customers in different market segments thus increasing demand to achieve growth in sales volume.
Unit production costs
These are likely to reduce for a number of reasons:
Direct materials are being bought in larger quantities and therefore PT may be able to negotiate better prices from its suppliers thus causing unit material costs to reduce
Direct labour costs may be reducing if the product is labor intensive due to the effects of the learning and experience curves
Other variable overhead costs may be reducing as larger batch sizes reduce the cost of each unit
Fixed production costs are being shared by a greater number of units.

Cima P2 Exam Question No 18

Question No 18:

Explain the likely changes that will occur in the unit selling prices AND in the unit production costs, compared to the preceding stage.(ii) Maturity stages of the new product's life cycle.

Unit selling prices
These are unlikely to be reducing any longer as the product has become established in the market place. This is a time for consolidation and while there may be occasional offers to tempt customers to buy the product the selling price is likely to be fairly constant during this period.
Unit production costs
Direct material costs are likely to be fairly constant in this stage. They may even increase as the quantities required diminish compared to those required in the growth stage, with the consequential loss of negotiating power.
Direct labour costs are unlikely to be reducing any longer as the effect of the learning and experience curves has ended. Indeed the workers may have started working on the next product so that their attention towards this product has diminished with the result that direct labour costs may increase.
Overhead costs are likely to be similar to those of the end of the growth stage as optimum batch sizes have been established and are more likely to be used in this maturity stage of the product life cycle where demand is more easily predicted.

Cima P2 Exam Question No 18

Question No 18:

Explain the likely changes that will occur in the unit selling prices AND in the unit production costs, compared to the preceding stage.

Unit selling prices
These are likely to be reducing for a number of reasons:
The product will become less unique as competitors use reverse engineering to introduce their versions of the product
PT may wish to discourage competitors from entering the market by lowering the price and thereby lowering the unit profitability
The price needs to be lowered so that the product becomes attractive to customers in different market segments thus increasing demand to achieve growth in sales volume.
Unit production costs
These are likely to reduce for a number of reasons:
Direct materials are being bought in larger quantities and therefore PT may be able to negotiate better prices from its suppliers thus causing unit material costs to reduce
Direct labour costs may be reducing if the product is labour intensive due to the effects of the learning and experience curves
Other variable overhead costs may be reducing as larger batch sizes reduce the cost of each unit
Fixed production costs are being shared by a greater number of units.

Cima P2 Exam Question No 17

Question No 17:

Explain TWO reasons why the company might decide NOT to use this optimum selling price

•  There are many reasons why this price may not be used (candidates are expected to explain two).
• There may be inaccuracies in the demand forecasts at different prices because the model assumes that demand is driven solely by price. In fact there are many different factors that influence demand; these include advertising, competitor actions and changing fashions / tastes.
• The model also assumes that the relationship between price and demand is static whereas in reality it is regularly changing.
• There may be inaccuracies in the determination of the marginal cost, the assumption that marginal cost equals variable cost may itself be invalid, but even if this is acceptable then the assumption that all variable costs vary with volume is unrealistic. Some of these costs may be driven by factors other than volume. Again there is an assumption the unit variable cost is unchanging once it has been determined