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Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114Target Costing
Terracotta, Inc., makes toy soldiers. Company management believes that a new model would sell well at a price of $65. The company estimates unit materials costs to be $16 for the model, and overhead costs would average $20 per unit. The local wage rate for direct labor is $28 per hour. Terracotta has a goal of earning an operating profit of 30 percent of manufacturing costs for each of its products.
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What direct labor hour input (hours per unit) could Terracotta allow and still achieve its profit goal?
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Target costing:
Target costing is a method of managing the relationship between cost and price. It fixes price of a product first and works backward to determine the maximum cost it can afford for the product by subtracting the profit from the price. The price is determined based on market assessment by the firm.
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