ACCA Performance Management (F5) Certification Practice Exam

Which of the following is a challenge of target costing in service industries?

1. Standardization of services

2. Simultaneity (no transfer of ownership)

3. High inventory storage costs

4. Production delays

The correct answer is: Simultaneity (no transfer of ownership)

In service industries, simultaneity refers to the characteristic that services are produced and consumed simultaneously, meaning that there is no transfer of ownership of a tangible product. This presents a unique challenge for target costing because it complicates the pricing strategy and cost control measures typically associated with manufacturing. When moving through the target costing process, businesses must take into account that services cannot be held in inventory and need to be delivered in real-time to customers. This immediacy requires that service providers carefully manage costs while ensuring high quality and customer satisfaction at the moment of service delivery. This challenge is important because it creates a need for ongoing assessment and adjustment of costs and service processes in a way that is different from product-based businesses that can rely on set production schedules and inventory management. Understanding the nuance of simultaneity is crucial for effectively implementing target costing in the context of services.