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.