TARGET COSTING

Cost Plus Pricing:

Price/unit = cost/unit * mark-up rate % OR cost/unit +
profit/unit
Mark- Up Rate %:
Mark-up rate % = 1 + (required profit/unit) / (full cost/unit)
Market Based Pricing Target Pricing
Target cost = Target Price - Desired Profit (Margin)
Target Price = P1 + P2 + P3 + . P N sum of prices for
product features
VARIANCE ANALYSIS REVENUE AND COST
Standard cost per unit of output = Standard quantity of
input per unit of output * Standard cost per unit of input
AND Budgeted cost = Units produced (expected) *
Standard cost per unit of output
Actual Costs
Direct Materials = Std. direct material cost/unit * Actual
units
Direct Labor = Std. direct labor cost/unit * Actual units
Overhead Costs = Std. OH cost/unit * Actual Units
Formula: Standard Costs
Direct Materials = Std. quantity/unit of output * Std.
cost/unit of material
Direct Labor = Std. quantity (hrs)/unit of output * Std.
cost/hr
Overhead = Std. OH allocation rate * Std. quantity of
allocation base/unit of output
REVENUE VARIANCES
Actual Revenue: AP * AQS
Static Budget Revenue: EQS *SP
Flexible Budget Revenue: AQS * SP
Level 1: Static Budget Variance
Actual Revenue - Static Budget Revenue = AP * AQS EQS *SP
Level 2: [Flexible Budget Variance + Sales Volume
Variance = Static Budget Variance]
(AP * AQS) - (AQS * SP) - flexible budget variance
measures effect on revenue of a difference between the
actual and standard selling prices
(AQS - EQS)* SP - sales volume variance measures the
effect on total revenue of a difference between actual and
planned number of units sold

Level 3: Sales Volume Variance = sales mix variance +

sales quantity variance
(AQT) *(A%i - E%i) * (SP) - sales mix variance measures
the effect on revenue of a difference between the actual
and planned proportion of sales in each market
(AQT - EQT) * E%i * SP - sales quantity variance
measures the effect on revenue of a difference between the
actual and planned total number of units sold

FIXED COST

Fixed Manufacturing Overhead Account

Dr Fixed Manufacturing Overhead Control
Cr Fixed Manufacturing Overhead Applied (units
produced * budgeted allocation base *
budgeted allocation rate)
Budget Variance = Actual Fixed Manufacturing Costs Applied Fixed Manufacturing Cost
Production Volume Variance = Budgeted
COST VARIANCES
(Static/Flexible) Fixed Manufacturing Cost - Applied
Actual Costs = AQ * AI * AC
Fixed Manufacturing Cost
Static Budget Costs = EQ * SI * SC
SIFOH - allocation base for fixed overhead
Flexible Budget Costs = AQ * SI * SC
SCFOH - allocation rate for fixed overhead
Accounts:
Level 1: Budget Variances
Control Account (Actual cost of Input Used)
Actual FOH - Applied FOH: (AQ * AIFOH * ACFOH) - (AQ
Dr (AI * AC) * AQ or actual costs
* SIFOH * SCFOH)
Cr (SI * SC) * AQ or static budget costs
Level 2: Budget Variances = Spending Variances +
VARIABLE COST
Production Volume Variances
Level 1: Static Budget Variances
Actual Cost - Static Budget Cost = (AQ * AI * AC) - (EQ Spending Variance - Actual FOH - Budgeted FOH
Production Volume Variance: Budgeted FOH - (AQ *
* SI * SC)
SIFOH * SCFOH)
Level 2: Static Budget Variance = Volume Variance +
Flexible Budget Variance
PERFORMANCE EVALUATION
Volume Variance = Flexible Budget - Static Budget
(AQ * SI * SC) - (EQ * SI * SC) (AQ - EQ) * ROA or ROI (Income / Investment in Operating Assets)
Accounting Income (operating profit - Depreciation)
(SI * SC)
Residual Income (RI) = Reported after tax income Measures the effect on costs of a difference between the
actual and planned number of units sold
[(investment in operating assets) * (required rate of return)
Flexible Budget Variance = Actual costs - Flexible
]
Budget
Economic Value Added (EVA) = Adjusted after tax
[(AI * AC) - (SI * SC)] * AQ
operating income - [(adjusted total assets - current
Measures the effect on costs of a difference between the
liabilities) * weighted average cost of capital]
actual and standard/budgeted costs per unit produced
Payback Period = Total Investment / CF
(sold).
Level 3: Flexible Budget Variances = Spending Variance +
TRANSFER PRICING
Efficiency Variances
Spending (Price) Variances = Actual Cost - Total Acct
Input @ Std Cost
(AC - SC) * AI * AQ
Measures the total cost effect of a difference between the
actual and expected input costs (prices)
Efficiency Variances = Total Act Input @ Std Cost - Flex
Bud Cost
(AI - SI) * AQ * SC
Measures the total cost effect of a difference between
actual and expected quantity of inputs used