What is the Bangladesh standard on Audit(BSA-300) ? Describes in details

Corporate practice bd

 Target costing

Target costing is a cost management tools or techniques that a manager set of standard cost to achieve desire profit.Under this technique  try to cost as a  minimize level  to achieve target profit.

There are some  important formulas  of target costing are mention below.

  01.Target operating  Income =(Target revenue*% of profit).

Target Revenue=(sales units*selling price)

  02.Target operating income per unit=Target operating income/Units sales

  03.Target Manufacturing cost per unit:-

                      (A) Target selling price per unit  ****

                    Less: (B) Target income per unit  (****)

                               Target cost per unit (A-B)  ****

               Less: selling & Admin cost per unit  (****)

     Result  -Target manufacturing cost per unit *****

  Let,starts setting up selling price per unit on Target manufacturing cost Plus pricing

                                            Target manufacturing cost per unit = *****

              Add: Markup % on Target manufacturing cost per unit = ****

           Result-selling price per unit on Target manufacturing cost Plus Pricing

        04.Full cost pricing Method....

                               Its means all cost that include

                                                     Material cost = *****

                                                         Labor cost = *****

                                     Factory Overhead cost = *****

                                        Selling & Admin cost = *****

                                                 Marketing Cost =  *****

                   Others cost (including Fixed cost) = *****

                                        Result -Total full cost = *****

 So, Full cost per unit= Total full cost /Total units produce

 Now ,we calculate Markup % on full cost pricing:   

                                   (Desire profit/ Total Full cost)*100

                 Result-Markup % on full cost pricing =  *****

      Let,starts setting up selling price on full cost pricing

                                                         Full cost per unit = *****

                     Add: Markup % on Full cost (IF 20%) = *****

       Result-selling price per unit on full cost pricing = *****

      05. Target Rate of Return on investment (ROI): (Target operating income/Investment Capital )*100

           Here,Investment Capital=(Long term Asset+Current Asset)

       06.Target operating income =(Total Investment*ROI)

    07. Variable cost Plus Pricing=(Fixed cost+Profit+SG & A Expense /Total variable cost of the product)

                   Say for Example,

                                                Fixed cost=2,00,000

                                                      Profit =1,00,000

                                                      Total   =3,00,000

                                              Production =10,000 Units 

Total variable cost including selling cost =4,00,000

                                Variable cost per unit=4,00,000/10,000 units

                                                         Result = 40 per unit

Here, Markup % on variable cost = (Fixed cost+Profit) /(unit produce*Variable cost per unit)

                                                    =(2,00,000+1,00,000) /(10,000units@40 per units)

                                                   =  (3,00,000/4,00,000)*100

                                        Result =75%

 Let,starts setting up selling price per unit  on Variable  cost plus  pricing

                                                            Variable  cost per unit   = 40.00

                           Add: Markup % on Variable  cost ( 75%)    = 30.00

 Result-selling price per unit  on Variable  cost plus  pricing = 70.00

***Proved,***

            Sales revenue(10,000 units*70 per unit)=7,00,000

Less Variable cost(10,000 units*40.00 per unit)=(4,00,000)

                                          Less fixed cost(given)=(2,00,000)

                                                         Result profit=1,00,000 ***(Proved)****

 8 Absorption cost Plus pricing Method...

Here, 

we need to calculate absorption costing per unit,

we know that ,absorption costing per unit include :

Say for example:

                                  Material cost per unit = 2.50

                                      Labor cost per unit = 1.50

          variable manufacturing cost per unit =1.20

      Add: Fixed manufacturing cost per unit=50

                                 (500000/10000 units)

             Result total absorption cost per unit=55.20

we also calculate Mark up % on absorption costing, the formula is -

    = (Desire profit +SG & A Expense / Units sales*Absorption cost per unit)

 Let,starts setting up selling price on Absorption cost Plus pricing Method -

                                                                      Absorption cost per unit =55.20

                                Add: Markup % on Absorption cost  (IF 20%) = 11.04

     Result-selling price per unit under Absorption cost Plus pricing= 66.24

           Here, Desire profit =(Required ROI* Investment)

        Here, Investment Capital=(Long term Asset+Current Asset)

               09. Relevant cost plus pricing Method..

Here, we need to calculate Relevant costing per unit,

we know that ,Relevant costing per unit, include :

Say for example,

                                        Material cost per unit  = 3.50

                                             Labor cost per unit  = 2.50

     variable manufacturing OH cost per unit  = 1.20

                   Add: Relevant Fixed  cost per unit = 50

                                 (500000/10000 units)

                        Result total Relevant cost per unit = 57.20

we also calculate, Mark up % on relevant costing, the formula is -

    = (Desire profit +SG & A Expense / Units sales*Relevant cost per unit)

 Let,starts setting up selling price on Relevant cost plus pricing Method

                                                                      Relevant  cost per unit = *****

                    Add: Markup % on relevant cost per unit  (IF 20%) = ***** 

        Result-selling price per unit under relevant cost Plus pricing = *****

           Here, Desire profit =(Required ROI* Investment)

        Here, Investment Capital=(Long term Asset+Current Asset)

            10.Time and  Materials Pricing method.

 Introduction:-

Time and Materials pricing actually used  in the service and construction industries to billing the customers for a standard labor rate per hour used, plus the actual cost of materials used. 

         ***Area where Time and Materials pricing is used****

    01. Accounting Firm ,Auditing  & Tax service

     02.Consultancy

     03. Medical service

     04.Vehicle Service etc.

Under Time and Materials Pricing method we need to calculate-

01. Timing charge...

 Timing charge means actually hour worked for service@labour hour rate, if hourly labor rate is Tk.70.00 actually service spent  5 hours ,

Then ,Timing charge = ( 5hours*70.00 per hour ) = TK. 350

02. Material Loading charge...

Where as Material loading charge means at the time of service repair parts used in service property,and also included ordering handling, storing cost .

           Say for example,

                                       Parts invoice cost Tk. 90.00

                Ordering handling,storing cost 15% on Invoice cost

                                              Desire profit 10% on Invoice cost

               Result-Material loading charge %= (15+10)

                                                                         = 25%

                          So, cost of the Job is would be,

                         Timing charge= ( 5hours*70.00 per hour )=350.000 

                                          Material charge:

                                                 Invoice cost of parts = 90.00

 Add :Material loading charge(25% of Tk.90.00) = 22.50  

                                Total (invoice+ loading cost)      = 112.50

                Result Bill cost of the Jobs (350+112.50) = Tk.462.50

                11.Profit Maximizing Pricing Method

Under Profit Maximizing Pricing Method we should  calculate two  Factor like,

01.Profit maximizing markup on variable costing = -1/(1+Price elasticity of demand)

02.Price elasticity of demand=Ln(1+% change in Qty sold) / Ln(1+% change in price )

So , Profit Maximizing Pricing = (1+Profit maximizing markup on variable cost)* Variable cost per unit.

Here, are some Practical Example of Target pricing  for Clear concept.

 Practical Example 01.

(Under Absorption cost Plus pricing Method.) (CMA -January-2022)

                Unit  produce & sales per Annum =  50,000 units

                  The estimated product cost are as follows-

                       Direct Material  cost per unit        = Tk.40.00

                            Direct labor cost  per unit         =  Tk.20.00

              Variable Manufacturing OH per unit    = TK.12.00

                                  Fixed Manufacturing OH      = Tk.50,000 per year

            Variable selling & Admin cost per unit    =  Tk.7.00

                Fixed selling & Admin cost per year     = Tk.40,000

Estimated required investment  by the company  = Tk.1,20,000

                                                               Desire ROI     = 12% [Rate of return]

 The company uses Absorption costing approach to cost plus pricing...

Required:

01. Compute target sales value  where the company use to achieve  desired ROI

02.Compute Target selling price per unit

Solution:-

(Step-01) -calculate Desire ROI =(Required Investment*ROI)

                                                 =Tk.(1,20,000*.12)

                                                  =Tk. 14,400

(Step-02) -Absorption cost per unit:

                                                                      Direct Material  cost per unit=Tk.40

                                                                            Direct labor cost  per unit=Tk.20

                                                         Variable Manufacturing OH per unit =TK.12

Fixed Manufacturing OH per unit (Tk.50,000.000 per year/50000 units)=TK.1

                                                                       Total Absorption cost per unit =Tk.73

(Step-03) -Total selling & Admin cost:

Variable selling & Admin cost( 50000 units@7.000per unit) =Tk.3,50,000.000

                                       Fixed selling & Admin cost per year =Tk.40,000.000

                                                         Total selling & Admin cost: =Tk.3,90,000

(Step-04) -Mark up % on absorption costing 

                  = (Desired profit+Total selling & Admin cost) / 50,000unit@73.000 per unit)

                                   = TK.(14,400+3,90,000) / 36,50,000

                                   = (TK.4,04,400 / 36,50,000)*100

                                   = 11.07945 %                 

(Step-05) Target selling price:-

                Total Absorption cost per unit =Tk.73

Add:Mark up % on absorption costing = TK. 8.088

                (TK.73.000@11.07945%)

         Target selling price: =TK.81.088 per unit

   Req-01. Compute target sales value  where the company use to achieve  desired ROI

                                  =(50000.000 units@ Target selling price per unit )

                                  =(50000.000 units@ 81.088 )

                                   = TK.40,54,400.000

     Req-02. Target selling price: =TK.81.088 per unit

                   ***Proved,****

                            Sales = (50000.000 units@ 81.088 per unit ) = TK.40,54,400.000

                                 Less :Manufacturing cost (50000@73.00) = TK.(36,50,000.000)

                                                                               Gross margin =TK.4,04,400.000

                                                Less:Total selling & Admin cost:=Tk.(3,90,000.000)

                                                                                Desired Profit = TK.14,400.000 ***( Proved).*****

  

Practical Example 02. - (Profit Maximizing Pricing Method.)

The ABC co. believe that a 10% increase the selling price of their shampoo  products   would result in a 15% decrease  in the number of shampoo sold. where as Variable cost per unit =Tk.2.00

Requirement:

01.What is the Price elasticity of demand?

02.What is the profit Maximizing Pricing?

Solution:

At first we calculate Price elasticity of demand

Price elasticity of demand=Ln(1+% change in qty sold) / Ln(1+% change in price )

                                          = Ln[1+(-0.15)] / Ln[1+(0.10]

                                               = Ln(0.85) / Ln(1.10)

                                              = -1.71

 

2ndly- Profit maximizing markup on variable costing = -1/(1+Price elasticity of demand)

                                                                                      = -1/[1+(-1.71)]

                                                                                       = 1.41

So , Profit Maximizing Pricing = (1+Profit maximizing markup on variable cost)* Variable cost per unit.

                                                      = (1+1.41)* 2.00 per unit

                                                       = Tk.4.82

Practical Example 03. (Charles T.horngren) - (Under Full cost Plus pricing Method.)

                 The wimax company  LTD. Provide following information..

                01.The wimax Target Investment=TK.1,30,00,000

               02.Expected production and sales =5,00,000 cases

               03.ROI=10%

             Expected cost next year are as follows:

                             Variable production cost =3.50 per cases

         Variable marketing & distribution cost =1.50 per case

                                     Fixed production cost=10,00,000

             Fixed marketing & distribution cost =7,00,000

                                          Others Fixed cost =5,00,000

Requirement: ***Try to Solve this***

01.What is the Target operating income?

02.What is the target selling Pricing? (Use full cost plus pricing method)

03.Facing the competitor  price   the wimax company  LTD ,Increasing the selling price to 14 per cases,Assuming there are production & sales decreasing by 5% .Calculate the return on investment  where as is increasing selling price may be a good Idea for the the wimax company  LTD.