Page 260 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 14: Introduction to Recent Development in Cost Management

From the above table, the activity-based costing is obviously understood, It means that the charge Notes
of overhead is calculated on the basis of appropriate resources consumption, but the traditional
cost system determines the cost on the basis of overhead recovery rate.

Self Assessment

Fill in the blanks:
1. The assignment of cost to cost object only on the basis of ...................... clearly determines
the real consumption of the activity.

2. ...................... is an activity which directly charges to cost object, which could be classifi ed
into two different categories, in accordance with the nature of business.

3. The selection of the best investment proposal among the available purely depends upon
the earning potential over the ...................... .

4. The segmentation of the products should be appropriately done only by studying the

...................... and activity drivers, for meeting the needs and demands of specific class of
buyers.

5. The degree of correlation between the consumption of ...................... and consumption of
cost drivers shows the trend of the cost assignment in the context of cost drivers.

14.2 Target Costing

Target Costing is a disciplined process that uses data and information in a logical series of
steps to determine and achieve a target cost for the product. In addition, the price and cost are

for specified product functionality, which is determined from understanding the needs of the
customer and the willingness of the customer to pay for each function.
Another interesting aspect of Target Costing is its inherent recognition that there are important
variables in the process that are essentially beyond the control of the design group or even the
company.

Example: The selling price is determined by the marketplace – the global collection of
customers, competitors and the general economic conditions at the time the product is being
sold.

The desired profit is another variable that is beyond the control of the design organization. It may

be set at the corporate level. It is influenced by the expectation of the stockholders and the fi nancial
markets. And, the desired profit is benchmarked against others in the same industry and against

all businesses. In this complicated environment, it is the role of Target Costing to balance these
external variables and help develop a product at a cost that is within the constraints imposed. In
short, traditional approaches, such as simple “cost-plus” is a recipe for market failure, and giving
the customers more than they are willing to pay for is a recipe for insolvency.

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