ALTERNATIVE COSTING PRINCIPLES

(PART 2)
(for two consecutive seminars)
TASK №1: DEFINITIONS

Match the following sentences (1-8) with the words or phrases (A-H) on the following
page. Write your answers in the grid below. You can use one letter more than one!
A. Product life cycle E. Total quality management
B. Life cycle costs F. Cost of internal failure
C. Cost of external failure G. Target cost
D. Cost gap H. Life cycle costing

1. … … … is the process of applying a zero defect philosophy to the

management of all resources and relationships within an organization

2. … … … is the accumulation of costs over a product's entire life.

3. A product's … … … are incurred from its design stage through development to market launch,
production and sales, and finally to its eventual withdrawal from the market.

4. … … … is an estimate of a product cost which is determined by subtracting a desired profit margin

from a competitive market price

5. A … … … can be divided into four phases. • Maturity • Introduction • Decline • Growth

6. … … … – 'Costs arising from inadequate quality which are identified before the
transfer of ownership from supplier to purchaser'

7. … … … – 'Costs arising from inadequate quality discovered after the transfer of

ownership from supplier to purchaser'

8. … … … = estimated cost – target cost

TASK № 2: TRUE/FALSE
1. Life cycle costing is the profiling of cost over a product's production life.
A) True B) False

2. The following statements relate to life-cycle costing:

(1) It takes into account a product’s total costs over its entire life
A) True B) False

(2) It focuses on the production of monthly profit statements throughout a product’s entire life
A) True B) False

3. Are the following statements true or false?

(1) Life cycle costing assesses a product's profitability over its entire life
A) True B) False
(2) The aim of life cycle costing is to understand product profitability more fully
A) True B) False

4. Target cost is calculated: Market price – standard profit margin

Is this statement true or false?
A) True B) False
5. In the Growth stage of the product's life cycle initial costs of the investment in the product typically
recovered?
A) True B) False

TASK № 3: FOUNDATION LEVEL QUESTIONS

1. During which stage of the product life cycle do sales revenues increase and the product begins
to make a profit'?

A. Introduction C. Maturity
B. Growth D. Decline

2. A product is in the stage of its life cycle which is typified by falling prices but good profit
margins due to high sales volumes. What stage is it in?

A. Growth C. Introduction
B. Maturity D. Decline

3. Which costing method is based around a calculation involving a desired profit margin and a
competitive market price?

A. Activity Based Costing

B. Total Quality Management
C. Target costing
D. Life cycle costing

4. The selling price of product K is set at $450 for each unit and the company requires a return of
20% from the product.
What is the target cost for each unit for the coming year?

A. $360 C. $400
B. $300 D. $450

5. Which stage of the product life cycle do the following characteristics refer to?

A. New competitors
B. Customer feedback received
C. New distribution outlets being found
D. Product quality improvements made

6. Which of the following BEST describes target costing?

A. Setting a selling price for the company to aim for in the long run
B. Setting a price by adding a desired profit margin to a production cost
C. Setting a cost for the use in the calculation of variances
D. Setting a cost by subtracting a desired profit margin from a competitive market price

7. In ABC the assumption is that __________ use resources or cause costs.

A. Activities
B. Products
 TASK № 4: INTERMEDIATE LEVEL QUESTIONS

1. In calculating the life cycle costs of a product, which of the following items would be excluded?

(1) Planning and concept design costs

(2) Preliminary and detailed design costs
(3) Testing costs
(4) Production costs
(5) Distribution and customer service costs

A. (3)
B. (4)
C. (5)
D .None of them

2. A car manufacturer wants to calculate a target cost for a new car, the price of which will be set
at $17,950. The company requires an 8% profit margin. Required What is the target cost?

__________

3. The following statements relate to life-cycle costing:

(i) It helps forecast a product’s profitability over its entire life.
(ii) It takes into account a product’s total costs over its entire life.
(iii) It focuses on the production of monthly profit statements throughout a product’s entire life
Which of the statements are true?

A. 1 and 3 only
B. 1 and 2 only
C. 2 and 3 only
D. all of the above

4. Which of the following costs would be included to find the life-cycle cost of a product?
(i) Research and development costs
(ii) Production costs
(iii) Distribution costs
(iv) Marketing costs

A. 1, 2 and 3
B. 1, 3 and 4
C. 2, 3 and 4
D. all of the above

5. Fill in the blanks using words from the list (a) to (d).
Target cost = ........................................ minus ........................................

A. target selling price

B. estimated cost
C. estimated selling price
D. target profit
6. As part of a process to achieve a target cost, GYE Inc are interviewing prospective customers
to determine why they would buy the product and how they would use it
What term best describes this process?

A. Value analysis
B. Operational research
C. TQM
D. Lifecycle costing

7. A new product is being developed. The development will take one year and the product is
expected to have a life cycle of two years before it is replaced.
Which of the following statements are true of life cycle costing?

Statement 1 It is useful for assessing whether new products have been successful.
Statement 2 The individual profitability for products is less accurate.

A. Both statements are true

B. Both statements are false
C. Statement 1 is true and statement 2 is false
D. Statement 2 is true and statement 1 is false

TASK № 5: ADVANCED LEVEL QUESTIONS

1. Great Games, a manufacturer of computer games, is in the process of introducing a new game
to the market and has undertaken market research to find out about customers’ views on the
value of the product and also to obtain a comparison with competitors’ products. The results of
this research have been used to establish a target selling price of $60.
Cost estimates have been prepared based on the proposed product specification.
Manufacturing cost $
Direct material 3.21
Direct Labour 24.03
Direct machinery costs 1.12
Ordering and receiving 0.2
Quality assurance 4.60
Non-manufacturing costs
Marketing 8.15
Distribution 3.25
After-sales service 1.30

The target profit margin for the game is 30% of the proposed selling price
Required: Calculate the target cost of the new game and the target cost gap.
2. A company has designed a new product. NP8. It currently estimates that in the current market,
the product could be sold for $70 per unit. A gross profit margin of at least 30% on the selling
price would be required, to cover administration and marketing overheads and to make an
acceptable level of profit.
A cost estimation study has produced the following estimate of production cost for NP8.

Cost item
Direct material M1 $9 per unit

Direct material M2 Each unit of product NP8 will require three metres of material
M2, but there will be loss in production of 10% of the material
used. Material M2 costs $1.80 per metre

Direct labour Each unit of product NP8 will require 0.50 hours of direct
labour time. However it is expected that there will be
unavoidable idle time equal to 5% of the total labour time paid
for. Labour is paid $19 per hour.

Production overheads It is expected that production overheads wil lbe absorbed into
product costs at the rate of $60 per direct labour hour, for each
active hour worked. (Overheads are not absorbed into the cost of
idle time.)

Required:
Calculate:
(a) the expected cost of Product NP8;
(b) the target cost for NP8;
(c) the size of the cost gap.

3. Match the following sentences related to life cycle costing (1-4) with the words (A-D) below.

A. Growth B. Introduction
C. Decline D. Maturity

(1) At some stage, the market will have bought enough of the product and it will therefore
reach 'saturation point'. Demand will start to fall. Eventually it will become a loss-maker and this
is the time when the organisation should decide to stop selling the product or service.
(2) Eventually, the growth in demand for the product will slow down and it will enter a
period of relative ripeness. It will continue to be profitable. The product may be modified or
improved as a means of sustaining its demand.
(3) The product is placed to the market. Potential customers will be unaware of the product or
service, and the organisation may have to spend further on advertising to bring the product or service
to the attention of the market.
(4) The product gains a bigger market as demand builds up. Sales revenues increase and
the product begins to make a profit.