Management Accounting Performance Evaluation – (Target Costing)

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Your Homework:

Telebox Ltd designs, manufactures and sells ‘Set-Top Boxes’ (STB) for television viewing. A Set-Top Box is an electronic unit that can receive a digital television signal, including ‘High Definition’ (HD), and transmit this signal to the television. This allows the viewer to watch around 200 ‘free to air’ digital channels without the need for a subscription contract.  Telebox sells STB’s direct to the public from its website.

Recently, the Telebox design team have developed a new Wireless Set-Top Box (WSTB) using ‘Goldtooth’ wireless technology. The use of Goldtooth means that the WSTB does not have to be plugged into the television set (although the option to do this is still available on the WSTB). The Goldtooth wireless connection also allows the user to stream audio, video and internet content wirelessly from other electronic devices through the WSTB and onto the television set.

Market research suggests that each WSTB could be sold at £200 per unit. Management at Telebox have set an expected profit margin of 22%. Estimated costs for each unit (one WSTB) are as follows:

Circuit boards – these are bought-in from a supplier in Taiwan at £90 each (£50 for the circuit board plus £40 delivery cost). One circuit board is needed for each WSTB.

Wiring – each WSTB requires 35cm of wire. The wire is delivered in rolls of 30cm and each roll costs £10. With the current manufacturing technology it is not possible to use any wire left on a roll after manufacturing a WSTB.

Metal solder – this is used to make connections between wires and the circuit board in the unit. To save on costs, management have decided to use a low grade solder. Each unit needs 50 grams of solder. However, there is some waste in the process as the low grade solder does not always produce a working connection. This has been calculated as 5% of the solder purchased. The low grade solder costs £35 per 100 grams. Whilst high-grade solder costs an additional £1 per 100 grams it does not incur any waste.

Assembly labour – It should take half an hour to make a unit. Workers are paid £12 per hour.

Remote Control Units – These are currently bought in from a supplier for £5 each. One remote control unit is supplied with each WSTB. They are purchased in batches of 1,000 for which the additional shipping costs are £1,250. One of the design team at Telebox recently had the idea of programming the WSTB to work with existing television remote control units meaning that Telebox would not have to supply a remote control unit. The feasibility of this is needs to be established but it is expected that the additional programming will cost only £1 per unit.

Variable production overhead £15 per hour

Fixed production overhead £25 per hour

Additional costs for producing 200,000 WSTB units: Research £30,000 Design £25,000 Marketing and distribution £40,000 Web-site maintenance £20,000 Customer Service £10,000

Required:

  1. a) Apply a target costing approach to determine the expected cost for each unit (that is, one WSTB) and identify any cost gap that might exist. You should round your numbers to two (2) decimal places.

(10% of total grade. Part a) is not included in your word count)

  1. b) Write a report that recommends to the management of Telebox steps that they could take to reduce any cost gap identified. You should make specific reference to Telebox and the WSTB. (40% of total grade. Indicative word count is 800 words)
  1. c) ‘Target costing makes cost an input to the product development process, not an outcome of it…In Japan, lean enterprises have learned to view target costing not as a stand-alone program, but as an integral part of the product development process.’

Cooper, R, Slagmulder, R., (1999) Develop Profitable New Products with Target Costing, Sloan Management Review40.4: 23-33

In light of the comments above from Cooper and Slagmulder (1999), critically evaluate the importance of the product development and design stage in the cost life-cycle as part of target costing.  You should refer to Telebox and the WSTB. You should write in an essay style and a range of relevant texts and journal articles should be referenced to support your evaluation.

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