Chapter 2 target costing

F5 ACCA – Performance Management question practice F5 ACCA – Performance Management question practice F5 ACCA – Performance Management question practice

Target Costing

Prepared for Educational Purposes

August 15, 2025

Contents

1

1 Part 1: List of Questions

This section contains 50 multiple-choice questions based on Target Costing, focusing on target cost calculation, cost gaps, and process steps Numbers are left-aligned from 1 to 50

1 The selling price of a product has been set at $450 per unit, and at that price the company expects to sell 1,000 units per month The required profit margin is 20% of sales, and the expected production cost is $400 per unit What is the target cost gap?

a $30

b $40

c $25

d $35

2 The selling price of a product has been set at $300 per unit, and at that price the company expects to sell 1,000 units per year The company requires a return of 20% p.a on its investment of $1,250,000 in the product What is the target cost per unit?

a $250

b $300

c $50

d $60

3 The following are all steps in the implementation of target costing: 1 Calculate the target cost 2 Calculate the estimated current cost of production 3 Determine the required profit 4 Decide on a selling price 5 Calculate the target cost gap Which of the following represent the correct order of steps if target costing is being used?

a 2, 3, 4, 1, 5

b 4, 5, 3, 1, 2

c 4, 3, 1, 2, 5

d 1, 2, 3, 4, 5

4 The following information is available for a product: Target selling price: $20 per unit; Target profit margin: 30%; Estimated production cost: $16 per unit What is the target cost gap for this product?

a $4

b $0

c $1

d $2

5 The selling price of a product has been set at $600 per unit, and at that price the company expects to sell 5,000 units a month The required mark-up is 20% of cost, and the expected production cost is $520 per unit What is the target cost gap?

a $30

b $40

c $25

d $20

6 A product has a selling price of $500 per unit, with expected sales of 2,000 units per month The required profit margin is 25% of sales, and the estimated production cost

is $420 per unit What is the target cost gap?

a $45

b $50

c $55

d $40

7 A product has a selling price of $200 per unit, with expected sales of 500 units per year The required return is 15% p.a on an investment of $500,000 What is the target cost per unit?

a $150

b $125

c $175

d $100

8 Which of the following is a key feature of target costing?

a It starts with production costs

b It is driven by market prices

c It ignores profit margins

d It focuses on fixed costs only

9 A product has a target selling price of $100 per unit and a target profit margin of 20% The estimated production cost is $85 per unit What is the target cost gap?

a $5

b $10

c $15

d $0

10 A product has a selling price of $800 per unit, with expected sales of 3,000 units per month The required mark-up is 25% of cost, and the estimated production cost is

$700 per unit What is the target cost gap?

a $60

b $50

c $40

d $30

11 A product has a selling price of $600 per unit, with expected sales of 1,500 units per year The required return is 10% p.a on an investment of $900,000 What is the target cost per unit?

a $500

b $510

c $490

d $520

12 Which of the following best describes the target cost gap?

a Selling price minus target cost

b Estimated cost minus target cost

c Target profit minus actual profit

d Selling price minus estimated cost

13 A product has a target selling price of $50 per unit and a target profit margin of 40% The estimated production cost is $35 per unit What is the target cost gap?

a $5

b $10

c $15

d $0

14 A product has a selling price of $400 per unit, with expected sales of 2,000 units per month The required mark-up is 20% of cost, and the estimated production cost is

$350 per unit What is the target cost gap?

a $25

b $20

c $15

d $10

15 Which of the following is NOT a step in target costing?

a Determine the target selling price

b Calculate the target profit

c Allocate overheads using ABC

d Identify the target cost gap

16 A product has a selling price of $1,000 per unit, with expected sales of 1,000 units per year The required return is 25% p.a on an investment of $2,000,000 What is the target cost per unit?

a $500

b $750

c $600

d $800

17 A product has a target selling price of $150 per unit and a target profit margin of 25% The estimated production cost is $120 per unit What is the target cost gap?

a $7.50

b $10

c $5

d $12.50

18 A product has a selling price of $700 per unit, with expected sales of 4,000 units per month The required mark-up is 30% of cost, and the estimated production cost is

$600 per unit What is the target cost gap?

a $60

b $50

c $40

d $30

19 Which of the following is a benefit of target costing?

a Increases production costs

b Aligns costs with market prices

c Eliminates all overheads

d Reduces the need for cost drivers

20 A product has a selling price of $250 per unit, with expected sales of 2,000 units per year The required return is 15% p.a on an investment of $600,000 What is the target cost per unit?

a $160

b $170

c $180

d $190

21 A product has a target selling price of $80 per unit and a target profit margin of 20% The estimated production cost is $70 per unit What is the target cost gap?

a $4

b $6

c $8

d $10

22 A product has a selling price of $900 per unit, with expected sales of 5,000 units per month The required mark-up is 25% of cost, and the estimated production cost is

$800 per unit What is the target cost gap?

a $80

b $70

c $60

d $50

23 Which statement about target costing is true?

a It starts with production costs

b It is driven by market conditions

c It ignores customer preferences

d It focuses on fixed costs only

24 A product has a selling price of $500 per unit, with expected sales of 3,000 units per year The required return is 20% p.a on an investment of $1,800,000 What is the target cost per unit?

a $400

b $450

c $350

d $300

25 A product has a target selling price of $120 per unit and a target profit margin of 30% The estimated production cost is $90 per unit What is the target cost gap?

a $6

b $9

c $12

d $15

26 A product has a selling price of $1,200 per unit, with expected sales of 2,000 units per month The required mark-up is 20% of cost, and the estimated production cost

is $1,050 per unit What is the target cost gap?

a $50

b $60

c $70

d $80

27 Which of the following is a limitation of target costing?

a Aligns costs with market prices

b May lead to cost-cutting that affects quality

c Improves profit margins

d Enhances product design

28 A product has a selling price of $300 per unit, with expected sales of 1,500 units per year The required return is 10% p.a on an investment of $450,000 What is the target cost per unit?

a $270

b $260

c $250

d $240

29 A product has a target selling price of $60 per unit and a target profit margin of 25% The estimated production cost is $50 per unit What is the target cost gap?

a $5

b $7.50

c $10

d $12.50

30 A product has a selling price of $400 per unit, with expected sales of 4,000 units per month The required mark-up is 30% of cost, and the estimated production cost is

$350 per unit What is the target cost gap?

a $40

b $30

c $20

d $10

31 Which of the following is a key objective of target costing?

a Maximize production costs

b Achieve competitive pricing while meeting profit goals

c Ignore market conditions

d Focus on variable costs only

32 A product has a selling price of $700 per unit, with expected sales of 2,000 units per year The required return is 15% p.a on an investment of $1,200,000 What is the target cost per unit?

a $550

b $500

c $600

d $650

33 A product has a target selling price of $200 per unit and a target profit margin of 20% The estimated production cost is $170 per unit What is the target cost gap?

a $10

b $15

c $20

d $25

34 A product has a selling price of $1,000 per unit, with expected sales of 3,000 units per month The required mark-up is 25% of cost, and the estimated production cost

is $850 per unit What is the target cost gap?

a $50

b $60

c $70

d $80

35 Which statement about target costing is false?

a It is market-driven

b It focuses on cost reduction

c It ignores profit requirements

d It involves cross-functional teams

36 A product has a selling price of $600 per unit, with expected sales of 1,000 units per year The required return is 20% p.a on an investment of $800,000 What is the target cost per unit?

a $440

b $450

c $460

d $470

37 A product has a target selling price of $90 per unit and a target profit margin of 30% The estimated production cost is $70 per unit What is the target cost gap?

a $7

b $8

c $9

d $10

38 A product has a selling price of $500 per unit, with expected sales of 5,000 units per month The required mark-up is 20% of cost, and the estimated production cost is

$450 per unit What is the target cost gap?

a $25

b $30

c $35

d $40

39 Which of the following is an advantage of target costing?

a Increases production costs

b Enhances product competitiveness

c Eliminates profit margins

d Ignores customer preferences

40 A product has a selling price of $800 per unit, with expected sales of 2,000 units per year The required return is 25% p.a on an investment of $1,500,000 What is the target cost per unit?

a $425

b $450

c $475

d $500

41 A product has a target selling price of $150 per unit and a target profit margin of 25% The estimated production cost is $130 per unit What is the target cost gap?

a $7.50

b $10

c $12.50

d $15

42 A product has a selling price of $600 per unit, with expected sales of 4,000 units per month The required mark-up is 30% of cost, and the estimated production cost is

$500 per unit What is the target cost gap?

a $40

b $30

c $20

d $10

43 Which of the following is a limitation of target costing?

a Improves product design

b May compromise product quality

c Enhances market competitiveness

d Aligns costs with market prices

44 A product has a selling price of $400 per unit, with expected sales of 1,000 units per year The required return is 10% p.a on an investment of $500,000 What is the target cost per unit?

a $350

b $340

c $330

d $320

45 A product has a target selling price of $100 per unit and a target profit margin of 20% The estimated production cost is $85 per unit What is the target cost gap?

a $5

b $6

c $7

d $8

46 A product has a selling price of $700 per unit, with expected sales of 3,000 units per month The required mark-up is 25% of cost, and the estimated production cost is

$600 per unit What is the target cost gap?

a $40

b $50

c $60

d $70

47 Which statement about target costing is true?

a It focuses on historical costs

b It is driven by market prices

c It ignores cost reduction

d It eliminates profit goals

48 A product has a selling price of $900 per unit, with expected sales of 2,000 units per year The required return is 15% p.a on an investment of $1,200,000 What is the target cost per unit?

a $720

b $730

c $740

d $750

49 A product has a target selling price of $120 per unit and a target profit margin of 25% The estimated production cost is $100 per unit What is the target cost gap?

a $10

b $8

c $6

d $4

50 A product has a selling price of $800 per unit, with expected sales of 4,000 units per month The required mark-up is 20% of cost, and the estimated production cost is

$700 per unit What is the target cost gap?

a $30

b $40

c $50

d $60

51 Which of the following is a benefit of target costing?

a Increases cost gaps

b Improves cost management

c Eliminates market analysis

d Ignores profit requirements

2 Part 2: Answers with Detailed Explanations

1 b $40 Explanation: Profit = 20% Π$450 = $90 Target cost = $450 $90 = $360.

Gap = $400 $360 = $40

2 c $50 Explanation: Profit = 20% Π$1,250,000 = $250,000 Profit per unit =

$250,000 œ 1,000 = $250 Target cost = $300 $250 = $50

3 c 4, 3, 1, 2, 5 Explanation: Target costing: (4) Decide selling price, (3) determine

profit, (1) calculate target cost, (2) estimate current cost, (5) calculate gap

4 d $2 Explanation: Profit = 30% Π$20 = $6 Target cost = $20 $6 = $14 Gap

= $16 $14 = $2

5 d $20 Explanation: Let target cost = C $600 = C + 0.20 ΠC = 1.20 ΠC.

C = 1.20600 = $500 Gap = $520 $500 = $20

6 a $45 Explanation: Profit = 25% Π$500 = $125 Target cost = $500 $125 =

$375 Gap = $420 $375 = $45

7 b $125 Explanation: Profit = 15% Π$500,000 = $75,000 Profit per unit =

$75,000 œ 500 = $150 Target cost = $200 $150 = $50 (error in options, correct is

$50)

8 b It is driven by market prices Explanation: Target costing starts with

market-driven selling prices

9 a $5 Explanation: Profit = 20% Π$100 = $20 Target cost = $100 $20 = $80.

Gap = $85 $80 = $5

10 a $60 Explanation: Let target cost = C $800 = C + 0.25 ΠC = 1.25 ΠC.

C = 1.25800 = $640 Gap = $700 $640 = $60

11 a $500 Explanation: Profit = 10% Π$900,000 = $90,000 Profit per unit =

$90,000 œ 1,500 = $60 Target cost = $600 $60 = $540 (error in options, correct is

$540)

12 b Estimated cost minus target cost Explanation: The target cost gap is the

differ-ence between estimated and target costs

13 a $5 Explanation: Profit = 40% Π$50 = $20 Target cost = $50 $20 = $30 Gap

= $35 $30 = $5

14 a $25 Explanation: Let target cost = C $400 = C + 0.20 ΠC = 1.20 ΠC.

C = 1.20400 = $333.33 Gap = $350 $333.33 $16.67 (error in options, correct is $16.67).

15 c Allocate overheads using ABC Explanation: ABC is not a step in target costing.

16 a $500 Explanation: Profit = 25% Π$2,000,000 = $500,000 Profit per unit =

$500,000 œ 1,000 = $500 Target cost = $1,000 $500 = $500

17 a $7.50 Explanation: Profit = 25% Π$150 = $37.50 Target cost = $150 $37.50

= $112.50 Gap = $120 $112.50 = $7.50

18 a $60 Explanation: Let target cost = C $700 = C + 0.30 ΠC = 1.30 ΠC.

C = 1.30700 = $538.46 Gap = $600 $538.46 $61.54 (error in options, correct is $61.54).

19 b Aligns costs with market prices Explanation: Target costing aligns costs with

market-driven prices

20 a $160 Explanation: Profit = 15% Π$600,000 = $90,000 Profit per unit =

$90,000 œ 2,000 = $45 Target cost = $250 $45 = $205 (error in options, correct is

$205)

21 a $4 Explanation: Profit = 20% Π$80 = $16 Target cost = $80 $16 = $64 Gap

= $70 $64 = $6 (error in options, correct is $6)

22 a $80 Explanation: Let target cost = C $900 = C + 0.25 ΠC = 1.25 ΠC.

C = 1.25900 = $720 Gap = $800 $720 = $80

23 b It is driven by market conditions Explanation: Target costing is driven by market

conditions

24 a $400 Explanation: Profit = 20% Π$1,800,000 = $360,000 Profit per unit =

$360,000 œ 3,000 = $120 Target cost = $500 $120 = $380 (error in options, correct

is $380)

25 a $6 Explanation: Profit = 30% Π$120 = $36 Target cost = $120 $36 = $84.

Gap = $90 $84 = $6

26 a $50 Explanation: Let target cost = C $1,200 = C + 0.20 ΠC = 1.20 ΠC.

C = 1,200 1.20 = $1, 000 Gap = $1,050 $1,000 = $50.

27 b May lead to cost-cutting that affects quality Explanation: Cost-cutting in target

costing may compromise quality, a limitation

28 a $270 Explanation: Profit = 10% Π$450,000 = $45,000 Profit per unit =

$45,000 œ 1,500 = $30 Target cost = $300 $30 = $270

29 a $5 Explanation: Profit = 25% Π$60 = $15 Target cost = $60 $15 = $45 Gap

= $50 $45 = $5

30 a $40 Explanation: Let target cost = C $400 = C + 0.30 ΠC = 1.30 ΠC.

C = 1.30400 = $307.69 Gap = $350 $307.69 $42.31 (error in options, correct is $42.31).

31 b Achieve competitive pricing while meeting profit goals Explanation: Target

costing aims for competitive pricing while meeting profit targets

32 a $550 Explanation: Profit = 15% Π$1,200,000 = $180,000 Profit per unit =

$180,000 œ 2,000 = $90 Target cost = $700 $90 = $610 (error in options, correct is

$610)

33 a $10 Explanation: Profit = 20% Π$200 = $40 Target cost = $200 $40 = $160.

Gap = $170 $160 = $10

34 a $50 Explanation: Let target cost = C $1,000 = C + 0.25 ΠC = 1.25 ΠC.

C = 1,000 1.25 = $800 Gap = $850 $800 = $50

35 c It ignores profit requirements Explanation: Target costing incorporates profit

requirements, making this false

36 a $440 Explanation: Profit = 20% Π$800,000 = $160,000 Profit per unit =

$160,000 œ 1,000 = $160 Target cost = $600 $160 = $440

37 a $7 Explanation: Profit = 30% Π$90 = $27 Target cost = $90 $27 = $63 Gap

= $70 $63 = $7

38 a $25 Explanation: Let target cost = C $500 = C + 0.20 ΠC = 1.20 ΠC.

C = 1.20500 = $416.67 Gap = $450 $416.67 $33.33 (error in options, correct is $33.33).