Target costing revision question (NBAA, B5, NOV 2018)



(a) Briefly explain the concept of “throughput accounting”.   In which sector is the concept mostly applied?

(b)    Assess the advantages of life cycle accounting.

(c)  JEMEX LTD  is  a  manufacturing company which  has  recently experienced an increased competition in the industry it operates.  The current selling price per unit is TZS.2,000 and the company is considering to reduce selling price by 20% in order to stimulate sales volume from 150,000 units to 200,000 units.   The competitors are also expected to cut prices of the product by 15% to survive in the market.   JEMEX LTD wants to earn at least 10% target profit.   The following information has been obtained:



Particulars Existing Target
Direct Material cost per unit (TZS) 400 385
Direct   Manufacturing   Labour   per   unit (TZS) 55 50
Direct Machinery costs per unit (TZS) 70 60
Direct Manufacturing costs per unit (TZS) 525 495
Manufacturing overheads    
No. of Orders (TZS.160 per order) 22,500 21,250
Testing hours (TZS.4 per hour) 4,500,000 3,000,000
Unit reworked (TZS.200 per unit) 12,000 13,000

Other operating costs per unit incurred by the company include: Research and Design TZS.100, and Marketing and Customer Service TZS.260.  Manufacturing overheads are allocated using relevant cost drivers.



REQUIRED:

(i) Calculate target costs per unit and target costs for the proposed volume showing break-up of different elements.

(ii)  Prepare Target Product Profitability Statement.

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