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6AC004 Week 4 Seminar Activities .
Answers to these activities should be prepared for the Friday session Activity 1 – Target Costing
A company producing vacuum cleaners has conducted market research and has concluded that it can sell 150,000 units( per year) with certain features at a price of £180 per cleaner. It is estimated that this model will have a 5 year life cycle, after which it will become obsolete. It will require an additional investment of £2,750,000 in equipment which will have a nil residual value after 5 years. The companies cost of capital is 10%( the five year annuity discount factor for this is 3.791) . The company has set a target NPV for the scheme of +£10,000,000.

Required: Calculate the target annual operating costs that would be allowed to achieve the targeted NPV.
Activity 2 Target Costing
A company is planning to replace its current production process with a new one, and has produced the following estimates:

Selling price per unit
Variable cost per unit
Fixed annual operating
costs
Sales volume

Current system
£41
£26
£485,000

New system
£35
£8
To be determined

40,000 per year

90,000 per year

The company is aiming to achieve five times its current annual operating profit with the new process. What is the target fixed cost for the new process? Activity 3. Standard Costing v Target Costing

Compare and contrast Standard Costing and Target Costing as techniques for controlling and management costs.
Activity 4 Cost Management- Target Costing and Life Cycle Costing X limited has developed a new type of television which is the first of its type to be introduced to the market.
Traditionally is has priced its televisions on the basis of standard manufacturing costs plus a profit margin.
Required:
1) Evaluate how life cycle costing and target costing could be applied to this television
2) Evaluate the market based pricing strategies that should be considered for the launch of this product.
3) Explain each stage of the life cycle of the television , and discuss the issues that the management team of X limited will need to deal with at each stage.

1

Activity 5 –Cost Management- General
Explain the following techniques/approaches and how they contribute to cost reduction:
Benchmarking
Interfirm Comparison
Activity Based Budgeting
Zero Based Budgeting
Activity 6 – Throughput Accounting
The following details relate to ready meals that were prepared for a food processing company:
Ready Meal
Selling Price
Ingredients
Oven Time(minutes per ready meal)

K
$/meal
5.00
3.60
10

L
$/meal
3.00
1.80
4

M
$/meal
4.40
3.15
8

Each meal is prepared by cooking the ingredients in a large oven. The availability of cooking time is limited and it is not possible to cook more than one meal in the oven at the same time. The best and worst use of the oven is which of the following?: A

B
C
D

Best Use
Meal K
Meal L
Meal L
Meal M

Worst Use
Meal L
Meal M
Meal K
Meal L

2

Activity 7 Throughput Accounting- effects on reported profit. Activity with Answer – For Discussion. Please read in advance of seminar session Bland PLC uses the absorption costing method in conjunction with a standard costing system . Costs are allocated to products on the basis of the number of units produced. This system is designed to meet external reporting requirement. The following data is provided on units of Production and Sales: Opening Stock

Add Production For Year
Less Sales For Year
=Closing Stock

2009
900
+2000
-1500
1400

2010
1400
+400
-1700
100

The standard costs for the product are the same in 2009 and 2010. The normal level of activity used to apportion fixed overheads is 2000 units per year for both years. The following financial information is available:

Selling Price

2009
£100per unit

Variable Direct Material Costs
Other Variable direct manufacturing costs
Variable Indirect manufacturing costs
Variable Marketing costs...
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