Which equation better describes target costing?

Question

BlackTom AI · Accepted Answer

Question restatement: The prompt asks which equation best describes target costing.
Option 1: 'Selling Price + Profit = Target Costs' This would imply Target Costs are increased by adding profit back to the selling price, which contradicts the idea of determining target costs by subtracting desired profit from the selling price. It misplaces the relationship between selling price, profit, and costs.
Option 2: 'Selling Price = Profit – Target Variable Costs' Here, a rearrangement would yield Profit = Selling Price + Target Variable Costs, which does not align with how target costing is typically framed. It also mistakenly treats target variable costs as deductive from price to reach profit, rather than defining target costs from price and profit.
Option 3: 'Target Variable Costs + Contribution Margin = Selling Price' This expresses a pricing formula where selling price equals costs plus contribution margin. While related to cost-plus and contribution concepts, it does not directly define target costs as a function of selling price and desired profit, which is the core of target costing.
Option 4: 'Selling Price – Desired Profit = Target Costs' This option captures the standard target costing equation: Target Costs equal the selling price minus the profit the company desires to earn. It reflects the reverse calculation at the heart of target costing—setting allowable costs to hit a planned price and profit level, guiding design and cost management accordingly.
In summary, the reasoning above shows why the first three options misstate the fundamental relationship between selling price, profit, and costs, while the fourth option correctly formalizes the target costing framework by subtracting the desired profit from the selling price to obtain target costs.

Which equation better describes target costing? 单项选择题

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