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CHAPTER 15 Target Costing and Cost Analysis for Pricing Decisions

SOLUTIONS TO EXERCISES
EXERCISE 15-36 (25 MINUTES) Cost-Plus Pricing Formula Variable manufacturing cost . . . . $20 $400 = $200 + (100% 0 $200)a Applied fixed manufacturing cost ......................................... 70 Absorption manufacturing cost . $27 $400 = $270 + 0 (48.15% $270)b Variable selling and administrative cost .................. 30 Allocated fixed selling and administrative cost ................. 50 Total cost $35 $400 = $350 + 0 (14.29% $350)c

(1)

(2)

(3)

Variable manufacturing cost . . . . $20 0 Variable selling and administrative cost .................. 30 (4) Total variable cost ................... $23 $400 = $230 + 0 (73.91% $230)d Explanatory Notes: ($400 $200) $200 = 100% ($400 $270) $270 = 48.15% (rounded) c ($400 $350) $350 = 14.29% (rounded) d ($400 $230) $230 = 73.91% (rounded)
a b

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SOLUTIONS TO PROBLEMS
PROBLEM 15-41 (30 MINUTES) 1. Cost-plus pricing begins by computing an items cost and then adds an appropriate markup. The result is the items selling price. In contrast, target costing begins by determining an appropriate selling price. A target profit is next subtracted from that price to yield the cost (i.e., the target cost) that must be achieved. Target costing could be labeled price-led costing because it begins by determining a target selling price. In contrast, cost-plus pricing methods begin with the cost and culminate in determination of the selling price. 2. The current selling price is $450: Direct material ... Direct labor Manufacturing overhead Selling and administrative expenses. Total cost. Markup ($360 x 25%) ... Selling price. .. $ 60 0 0 15 10 5 0 $36 0 9 0 $45 0

3.

Tianjins markup is $90, which is 20% of the current $450 selling price ($90 $450). To achieve a 20% markup on a $390 selling price, the company must reduce its costs by $48. Selling $3 price. 90 . Less: 20% markup ($390 x
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20%). 78 Target $3 cost 12 Current cost.. Less: Target cost. Required cost reduction 4. $3 60 3 12 $ 48

Yes. The company should focus its efforts on trimming non-value-added costs. These costs are associated with non-value-added activities (i.e., activities that are either (a) unnecessary and dispensable or (b) necessary, but inefficient and improvable). 5. If costs cannot be reduced below $360, Tianjin will have to reduce its markup to remain competitive. Assuming a desire to achieve the going market price of $390, the markup must equal $30 ($390 - $360), or 8.33% of cost ($30 $360). Given that the current markup on cost is 25%, a reduction of 16.67% is needed (25.00% - 8.33%).

1.

The statement means that selling prices are a function of market conditions; however, the selling prices must cover a companys costs in the long run. Also, in a number of industries, prices are based on costs. Yet, the prices are subject to the reaction of customers and competitors. 7. In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet 15-41.xls PROBLEM 15-45 (30 MINUTES) 1. (a) Time charges: annual overhead (excluding material handling and storage) + annual labor hours

Hourly

labor

cost

hourly charge to cover profit magin


McGraw-Hill/Irwin Inc. Managerial Accounting, 9/e Global Edition

2011 The McGraw-Hill Companies,


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= $16 +

$132,000 + $4 12,000

= $31 per labor hour (b) Material charges: Material cost + incurred onjob = cost materia material l handling and storage costs incurred onjob annual cost ofmaterials used = 108% x Material

Cost on Job 2. Time charges:

Material cost material cost $20,000 + incurred on job incurred on job $250,000

PRICE QUOTATION Labor time ............................. 500 hours

Rate .................................... $31 per hour Total ...................................... $15,50 0 Cost of materials for job ......... $50,00 0 x Materials cost markup ......... 1.08 Total ...................................... $54,00 0 Time ...................................... $15,50 0 Material ................................. 54,000 Total ...................................... $69,50 0 $69,500 5,400 $74,900

Material changes:

Total price of job:

3.

Price of job without markup on material costs (from requirement 2) ....................................... Markup on total material costs ($54,000 10%) Total price of job ..............................................

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