ACCA Performance Management (F5) Certification Practice Exam

Which approach can effectively reduce the cost gap using target costing?

1. Increasing marketing expenditure

2. Mechanizing production for lower average costs

3. Enhancing employee training programs

4. Investing in research and development

The correct answer is: Mechanizing production for lower average costs

The correct approach that can effectively reduce the cost gap using target costing is mechanizing production for lower average costs. This strategy focuses on improving operational efficiency through automation and advanced technology. By mechanizing production, a company can achieve economies of scale, reduce labor costs, and minimize human error, resulting in lower average costs per unit produced. Target costing is a pricing strategy that determines the allowable cost of a product based on the competitive market price and desired profit margin. To meet the target cost, organizations must identify ways to cut costs without compromising quality. Mechanization directly addresses the production cost structure, offering potential for significant cost savings. Other approaches, such as increasing marketing expenditure, enhancing employee training programs, and investing in research and development, while beneficial in their own contexts, do not directly target cost reductions in the manufacturing process. Increased marketing may enhance sales but does not directly lower production costs. Employee training can improve efficiency but may require upfront investment without immediate cost reductions in product costs. Research and development can lead to innovation and potentially better products, but it can also entail high costs without a direct impact on the current cost structure. Therefore, the most direct and effective method among the choices for reducing the cost gap in target costing is mechanizing production.