Question

True or False

1) Cost distortion can occur under the target-costing approach.

2) When a firm has excess capacity, a price that covers the incremental costs incurred because of the job will contribute toward covering the company’s fixed cost and profit.

3) When a computer-integrated manufacturing (CIM) system is used, the process of target costing sometimes is computerized.

4) Skimming pricing is another name for penetration pricing.

Answer 1

1) True

Cost distortion can occur under the target costing approach when traditional costing method is used to set the target prices. If Activity Based Costing method is used, then the cost distortion can be minimized. Hence, Cost distortion can occur under the target-costing approach.

2) False

In a firm that has excess capacity, a price that exceeds the incremental costs incurred because of the job will contribute towards covering the company’s fixed cost and profit. Any additional amount earned from the sale of excess units will go towards covering the fixed costs and profit.

3) True

When a computer-integrated manufacturing (CIM) system is used, the process of target costing sometimes is computerized. Target Costing can be computerized through the integration with a CIM system.

4) False

Skimming pricing uses high prices in the starting stages to maximize the short term profits from the targeted audience, whereas Penetration pricing strategy uses a low price in the beginning to attract customers and capture the market.