ACCA PM · Chapter 3
Target costing and life-cycle costing MCQs with Answers
9 multiple-choice questions on Target costing and life-cycle costing for ACCA PM Performance Management. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A product will sell for $90. The company requires a mark-up of 25% on cost. The current estimated cost is $75 per unit. What is the cost gap per unit?
- A) $7.50
- B) $15
- C) $18.75
- D) $3
Show answer & explanation
Answer: D) $3
With a mark-up of 25% on cost, selling price = 125% of cost. Target cost = $90 / 1.25 = $72. Cost gap = $75 - $72 = $3 per unit. Treating 25% as a margin on price would wrongly give a target cost of $67.50.
Question 2
What is the starting point in the target costing process?
- A) Calculating the full production cost of the existing design
- B) Setting a selling price that customers are expected to accept
- C) Adding a standard mark-up to the estimated variable cost
- D) Identifying the cost gap between estimated and actual costs
Show answer & explanation
Answer: B) Setting a selling price that customers are expected to accept
Target costing is market-led: it starts with the price customers will pay, deducts the required profit to give the target cost, and then compares this with the estimated cost to find the cost gap. Cost-plus pricing starts with cost, which is the opposite approach.
Question 3
A company plans to launch a product at a market price of $80. It requires a profit margin of 25% of the selling price. The current estimated cost of the product is $68 per unit. What is the cost gap per unit?
- A) $4
- B) $8
- C) $12
- D) $13
Show answer & explanation
Answer: B) $8
Target cost = selling price - required profit = $80 - (25% x $80) = $60. Cost gap = estimated cost - target cost = $68 - $60 = $8 per unit.
Question 4
A cost gap has been identified for a new kitchen appliance. Which of the following actions is most consistent with closing the gap through value engineering?
- A) Removing design features that customers do not value and using standardised components
- B) Increasing the selling price above the market price
- C) Reducing the required profit margin to zero
- D) Cutting the quality of features that customers rate as most important
Show answer & explanation
Answer: A) Removing design features that customers do not value and using standardised components
Value engineering redesigns the product to reduce cost without reducing the value perceived by customers, for example by removing unvalued features or using common components. Raising price above the market level or abandoning the profit target defeats the purpose of target costing, and cutting valued features reduces customer value.
Question 5
A new product is expected to sell 50,000 units over its life. Development costs will be $400,000, total marketing costs $250,000, variable production costs $12 per unit and decommissioning costs at the end of its life $50,000. What is the life-cycle cost per unit?
- A) $12.00
- B) $26.00
- C) $20.00
- D) $25.00
Show answer & explanation
Answer: B) $26.00
Total life-cycle cost = $400,000 + $250,000 + (50,000 x $12) + $50,000 = $1,300,000. Life-cycle cost per unit = $1,300,000 / 50,000 = $26.00.
Question 6
A product has a three-year life. Design costs of $300,000 are incurred before launch. Expected sales and variable costs are: Year 1, 10,000 units at $8 per unit; Year 2, 25,000 units at $9 per unit; Year 3, 15,000 units at $10 per unit. Product-specific fixed production costs are $60,000 per year, and disposal costs at the end of Year 3 are $40,000. Ignoring the time value of money, what is the life-cycle cost per unit?
- A) $19.50
- B) $12.70
- C) $15.90
- D) $18.70
Show answer & explanation
Answer: A) $19.50
Variable costs = (10,000 x $8) + (25,000 x $9) + (15,000 x $10) = $455,000. Total life-cycle cost = $300,000 + $455,000 + (3 x $60,000) + $40,000 = $975,000. Total units = 50,000. Life-cycle cost per unit = $975,000 / 50,000 = $19.50.
Question 7
At which stage of a product's life are the majority of its life-cycle costs committed (locked in)?
- A) The design and development stage
- B) The growth stage
- C) The maturity stage
- D) The decline stage
Show answer & explanation
Answer: A) The design and development stage
Design decisions about materials, components and production methods commit most of the costs that will later be incurred, even though actual spending occurs mainly during production. This is why life-cycle costing and target costing emphasise managing costs at the design stage.
Question 8
Which of the following is a benefit of life-cycle costing compared with traditional period-based cost reporting?
- A) Pre-production and post-production costs are attributed to the product so its total profitability over its life is visible
- B) It removes the need to set prices that cover development costs
- C) It treats research and development costs as period costs written off as incurred
- D) It focuses only on the annual production costs of mature products
Show answer & explanation
Answer: A) Pre-production and post-production costs are attributed to the product so its total profitability over its life is visible
Traditional reporting writes off research, development and decommissioning costs as period expenses, so they are not linked to the product that caused them. Life-cycle costing accumulates all costs over the product's life, helping managers judge whole-life profitability and set prices that recover all costs.
Question 9
During which stage of the product life cycle is a product likely to face slowing sales growth, intense price competition and a focus on cost control?
- A) Introduction
- B) Growth
- C) Development
- D) Maturity
Show answer & explanation
Answer: D) Maturity
In the maturity stage, the market is saturated, sales growth slows, competitors fight for share mainly on price, and firms focus on efficiency and cost control. The introduction stage features low sales and high promotion; the growth stage features rapidly rising sales.