Course: - PGDM- 5th Subject: - Strategic Cost Management

Semester: -5th Code: -FN-06

ASSIGNMENT

Q1.: A company has an opening stock of 6,000 units of output. The

production planned for the current year is 24,000 units and expected sales
for the current period amount to 28,000 units. This selling price per unit of
output is Rs.10. Variable cost per unit is expected to be Rs. 6 per unit while
it was only Rs. 5 per unit during the previous period. What is the Break-
even volume for the current period if the total fixed cost for the current
period is Rs.86,000?

Sol. As per FIFO METHOD –

Fixed cost 86000

(Less) contribution of 6000 units from opening stock (10- 30000
5)
Fixed o/h to be covered by contribution to break even 56000
Contribution p.u. from current production (10-6) 4
B.E.P. from current production (56000/4) 14000
Break even volume in units (6000+14000) 20000
Q2.: - “Target costing system is an important tool for the management to
control the cost” Discuss.
Ans.
Target costing is not just a method of costing, but rather a management
technique wherein prices are determined by market conditions, taking into
account several factors, such as homogeneous products, level of competition,
no/low switching costs for the end customer, etc. CIMA defines target cost as “a
product cost estimate derived from a competitive market price.

The key objective of target costing is to enable management to use proactive

cost planning, cost management, and cost reduction practices where costs are
planned and calculated early in the design and development cycle, rather than
during the later stages of product development and production

Compared to traditional standard costing approaches in which an estimate of

product, general administrative, marketing, and distribution costs is taken into
consideration, target costing takes on a more proactive approach to pricing.
Traditional costing determines cost based on the design of goods, adds a mark-
up and establishes a price. In comparison, the marketplace directs target costing
by first setting a selling price, then subtracting target income and finally
reaching a cost.
Traditionally, a cost figure is obtained, implemented and once found to be
poorly configured, sent back to management and engineers for reworking of
production processes and cutting of costs. In comparison, target costing utilizes
costing information and focuses on the best possible price up front, preventing
wasted time on after-the-fact discussions concerning design and re-engineering
of the product.
Q3 “Activity based costing system is different from traditional absorption
costing.” Discuss.
Absorption costing and activity-based costing differ in approach. Absorption
costing assigns costs to individual units, whereas activity-based costing focuses
on company activities as a central cost and then attempts to assign indirect costs
to units. 
One major advantage of activity-based costing is that it allows companies to
understand the true cost and profitability of individual units produced or
services rendered. This increased accuracy is achieved by essentially converting
indirect costs to direct costs. In fact, activity-based costing can be applied to all
business costs, not just production-related overhead. For instance, a company
can assign its marketing costs directly to the individual units it produces.
Because of this, activity-based costing can paint a more precise picture than
absorption costing. On the other hand, activity-based costing can be an
expensive system to implement, and it may not be as useful to companies whose
overhead costs are primarily volume-related, or to companies whose overhead
represents a small proportion of their overall costs.
Absorption costing, meanwhile, is easier to implement yet recognized as
perfectly compliant with generally accepted accounting principles and IRS
reporting requirements. The downside, however, is that it may offer less insight
to those charged with making strategic decisions regarding production practices
and costs.