CAF-5 · Chapter 12
Target Costing MCQs with Answers
10 multiple-choice questions on Target Costing for CAF-5 Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
How is a "Target Cost" mathematically derived for a product?
- A) Expected Manufacturing Cost plus Target Profit Margin
- B) Target Sales Price minus Minimum Gross Profit Margin
- C) Target Sales Price plus Minimum Gross Profit Margin
- D) Expected Full Cost minus Target Cost Gap
Show answer & explanation
Answer: B) Target Sales Price minus Minimum Gross Profit Margin
According to the target costing methodology demonstrated in the study text, the target cost is calculated by taking the expected sales price and subtracting the minimum required gross profit margin.
Question 2
Which of the following best defines the "Target Cost Gap"?
- A) The difference between the target selling price and the target profit.
- B) The difference between the expected cost per unit and the target cost per unit.
- C) The difference between the target selling price and the expected cost per unit.
- D) The difference between actual sales revenue and budgeted sales revenue.
Show answer & explanation
Answer: B) The difference between the expected cost per unit and the target cost per unit.
The target cost gap is defined as the difference between the currently expected cost per unit (what it will cost to make the product under current conditions) and the target cost per unit (what it must cost to achieve the target profit).
Question 3
A company plans to sell a new product (NP8) at a target sales price of Rs. 70 per unit. The company requires a minimum gross profit margin of 30%. What is the target cost for this product?
- A) Rs. 49
- B) Rs. 21
- C) Rs. 91
- D) Rs. 55
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Answer: A) Rs. 49
Target Cost = Sales Price – Minimum Gross Profit Margin. Gross Profit = 30% of Rs. 70 = Rs. 21. Target Cost = Rs. 70 – Rs. 21 = Rs. 49.
Question 4
Continuing from the previous scenario, if the company calculates that the expected full cost per unit of product NP8 will be Rs. 55, what is the size of the target cost gap?
- A) Rs. 15
- B) Rs. 21
- C) Rs. 6
- D) Rs. 0
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Answer: C) Rs. 6
The target cost gap is calculated by subtracting the target cost from the expected cost. Expected cost (Rs. 55) – Target cost (Rs. 49) = Target cost gap of Rs. 6.
Question 5
When estimating the total expected cost of a product to compare against the target cost, which of the following costs should be included?
- A) Only direct materials and direct labour.
- B) Only manufacturing costs (prime costs and production overheads).
- C) Manufacturing costs, plus non-manufacturing costs such as marketing, distribution, and after-sales service.
- D) Variable costs only.
Show answer & explanation
Answer: C) Manufacturing costs, plus non-manufacturing costs such as marketing, distribution, and after-sales service.
The study text illustrates that when establishing the full expected cost of a product for target costing, both manufacturing costs (materials, labour, machinery) and non-manufacturing costs (marketing, distribution, after-sales service) are accumulated.
Question 6
A company is evaluating its existing cost structure against its target cost. The current total expected cost of the product is Rs. 91,000 per unit, while the target cost has been calculated as Rs. 78,350 per unit. What does the difference of Rs. 12,650 represent?
- A) The target profit margin.
- B) The target cost gap that needs to be eliminated.
- C) The sunk cost of the product.
- D) The incremental revenue.
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Answer: B) The target cost gap that needs to be eliminated.
The difference between the existing/expected cost (Rs. 91,000) and the calculated target cost (Rs. 78,350) represents the target cost gap (Rs. 12,650) which the company must find a way to eliminate to achieve its desired profitability.
Question 7
In calculating the total expected cost for target costing purposes, how should estimated "rework costs" and expected "warranty costs" be treated?
- A) They should be completely ignored as they are abnormal losses.
- B) They should be deducted from the target selling price.
- C) They should be included as part of the total expected cost of the product.
- D) They should be treated as a separate target cost gap.
Show answer & explanation
Answer: C) They should be included as part of the total expected cost of the product.
Based on the cost accumulation schedules provided in the study text, rework costs and warranty costs are factored directly into the expected cost profile of the product before comparing it to the target cost.
Question 8
A business is launching a new digital game. The target profit margin is set at 30% of the target selling price. The target selling price is Rs. 10,000. If the expected manufacturing costs are Rs. 3,319 and the expected non-manufacturing costs are Rs. 1,270, what is the target cost gap?
- A) Rs. 3,000
- B) Rs. 2,411
- C) Rs. 7,000
- D) Rs. 0 (There is no cost gap)
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Answer: D) Rs. 0 (There is no cost gap)
Target Cost = Target Selling Price (10,000) - Target Profit (30% of 10,000 = 3,000) = Rs. 7,000. Total Expected Cost = Manufacturing (3,319) + Non-manufacturing (1,270) = Rs. 4,589. Since the Expected Cost (4,589) is already lower than the Target Cost (7,000), there is no target cost gap. (This uses the cost elements provided in the text).
Question 9
What is the primary objective of identifying a Target Cost Gap during the product development phase?
- A) To increase the target selling price until the gap is closed.
- B) To reduce the target profit margin so the shareholders expect less return.
- C) To highlight the amount of expected cost that must be reduced or eliminated (e.g., through value engineering or process improvement) before the product is launched.
- D) To calculate the break-even point in units.
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Answer: C) To highlight the amount of expected cost that must be reduced or eliminated (e.g., through value engineering or process improvement) before the product is launched.
The fundamental purpose of calculating a target cost gap is to identify exactly how much cost must be stripped out of the product's design, materials, or production process to ensure the product yields the required profit margin at the competitive market price.
Question 10
If a company successfully redesigns its product and streamlines its manufacturing process so that the expected full cost of the product falls exactly equal to the calculated target cost, what is the resulting target cost gap?
- A) It is equal to the target profit margin.
- B) It is zero.
- C) It is negative.
- D) It is equal to the target selling price.
Show answer & explanation
Answer: B) It is zero.
The target cost gap is mathematically Expected Cost - Target Cost. If the company reduces its expected cost so that it perfectly matches the target cost, the formula yields exactly zero, meaning the product is ready to launch and will hit its profit targets.