Financial Performance - Target costing

amyjayne27

Hi all,

I have my Financial Performance exam in 2 weeks and nervous doesnt even come close!

I am getting the hang of most things, I just cannot get my head around target costing? I seem to get stuck on it every time! Any advice? Is it likely to come up in exams?

Also when I am doing th CBAs I always get stuck on question 2.2 which usually is a break even, margin of safety question.

Also one more thing and its a really really stupid one but I just cannot think, when you are asked a question of how much a percentage increase it is, how do you calculate this? ie CBA number 2 question 1.5c.

Thanks for all your help

SandyHood

Amy what a lot of questions

I'll try to answer some

I just cannot get my head around target costing? I seem to get stuck on it every time! Any advice?

Imagine you own the business. You are planning to sell sandwiches at your local railway station. Your market research tells you, at £1.25 you'll sell 50. At a higher price sales dip dramatically.
You now need to decide on the profit per sandwich. 50 x 50p is £25.
So you can make and sell sandwiches so long as they cost a maximum of £0.75 each
The ingredients cost £0.35 each leaving you £0.40 for other costs
You've found someone who'll make them: he/she wants £8/hr but can make 40 sandwiches in that time

And you've a friend who will sell them for you for a commission of 20p per sandwich sold

50 x £1.25 £62.50
less
50 x £0.35 £17.50
1.25 hrs x £8 £10.00
50 x £0.20 £10.00

Profit £25.00

All looks well. Phew

But what about the railway company insisting on £5.00 for a daily licence or a food safety certificate
You'd need to look again at the other costs
Can you save £2.50 by cutting the sales commission to £0.15?
Can your sandwich maker speed up? 45 sandwiches per hour would mean you'd only have to pay for 1 hr and 7 minutes. At £8 per hour the cost comes down to £8.90 from £10.00 saving £1.10
Can ingredient prices be re-negotiated? If the cost can be brought down to £0.322 per sandwich that would save £1.40

Amy, does this help you to get into the business problem of target costing. I hope so.
This is a topic that needs understanding, rather than just learning. And if you can see the relative role of fixed costs and variable costs it will help with the question currently 2.2 on the exam.

Finding a % increase
Look at the difference in the value, and then divide by the original value.

amyjayne27

Morning Sandy,

Thanks so much for your reply. My apologies for so many questions but thought id ask them at the same time!

Your explanation has helped clear things up alot for me so thank you. I have attempted the green light target costing questions and got 70% so I am slowly getting there!

I have had nearly a year in between doing exams due to personal circumstances so its bit a bit of a struggle getting back to studying, especially with a difficult exam like Financial Performance!

Thanks for taking the time to reply.