Q1. Big Cheese Chairs (BCC) manufactures and sells executive leather chairs. They are considering a
new design of massaging chair to launch into the competitive market in which they operate.
They have carried out an investigation in the market and using a target costing system have targeted a
competitive selling price of $120 for the chair. BCC wants a margin on selling price of 20% (ignoring
any overheads).
The frame and massage mechanism will be bought in for $51 per chair and BCC will upholster it in
leather and assemble it ready for despatch.
Leather costs $10 per metre and two metres are needed for a complete chair although 20% of all leather
is wasted in the upholstery process.
The upholstery and assembly process will be subject to a learning effect as the workers get used to the
new design.
BCC estimates that the first chair will take two hours to prepare but this will be subject to a learning rate
(LR) of 95%. The learning improvement will stop once 128 chairs have been made and the time for the
128th chair will be the time for all subsequent chairs. The cost of labour is $15 per hour.
Required:
(a) Calculate the average cost for the first 128 chairs made and identify any cost gap that may
be present at that stage.
(8
marks)
(b) Assuming that a cost gap for the chair exists suggest four ways in which it could be closed.
(6 marks)
The production manager denies any claims that a cost gap exists and has stated that the cost of the
128th chair will be low enough to yield the required margin.
(c) Calculate the cost of the 128th chair made and state whether the target cost is being achieved
on the 128th chair.
(6
marks)
Q2. The following variances have been calculated in respect of a new product:


Direct labour efficiency variance
Direct labour rate variance
$14,700 Favourable
$5,250 Adverse
The variances were calculated using standard cost data which showed that each unit of the
product was expected to take 8 hours to produce at a cost of $15 per hour. Actual output of
the product was 560 units and actual time worked in the manufacture of the product totalled
3,500 hours at a cost of $57,750.
However, the production manager now realises that the standard time of 8 hours per unit
was the time taken to produce the first unit and that a learning rate of 90% should have been
anticipated for the first 600 units.
Required:
(a) Calculate planning and operating variances following the recognition of the learning
curve effect.
(6 marks)
(b) Explain the importance of learning curves in the context of Target Costing.
Note: The learning index for a 90% learning curve is -0.1520
(4 marks)
(Total for Question One = 10
marks)
Hint: Planning variance = (4480 – revised hours based on 90% learning)
Operational variances = (revised hours based on 90% learning – Actual hours)
Q3. WTI is planning to launch a new component. Production volume will be limited, with only 128
components to be produced in total.
WTI expects the manufacture of the first component to take 25 direct labour hours. It is anticipated
there will be a 90% learning curve that will continue until all 128 components have been produced.
Direct labour is paid at a rate of $15 per hour.
Non-labour-related costs are expected to be $265 per component; this will apply to all 128
components produced. There are no product-specific fixed costs associated with this new
component.
WTI is going to use a target costing approach for the new component. Based on the market research
it has undertaken, WTI plans to sell the components for $530 each. WTI requires an average profit
margin of 20% of the selling price over the life of this new component.
Note: The learning index for a 90% learning curve = -0.152
Required:
(a) Calculate the time required to produce the 128th component. (3 marks)
(b) Calculate the value of any cost gap between the target cost of 128 components in total and the
expected cost of 128 components in total.
(3 marks)
(c) Calculate the rate of learning required to close the cost gap you calculated in part (b) in order to
achieve the required profit margin of 20%.
(4 marks)
(Total for Question One = 10
marks)