Page 6 - CIMA MCS Workbook February 2019 - Day 1 Suggested Solutions

CIMA FEBRUARY 2019 – MANAGEMENT CASE STUDY

Investment

Each practice will have a substantial level of capital assets. Decisions on purchase and
replacement of these assets is likely to be made centrally, following a group policy. In this way,
the group can ensure consistency of the quality of service given by its practices and the
experience that customers have during their visits.

As the heads of practice spend 80% of their time on operational work, they are unlikely to want to
be tasked with making substantial decisions with regard to costs, revenues and investment.

It seems likely that most decisions for the practices would be taken centrally, with the practices
operating not as true cost, profit or investment centres.

2. TARGET COSTING

Target costing is a pro‐active cost control system. The starting point is to determine a price for a
product or service that is acceptable for the market. It is therefore an externally focused
approach. From this market price, a required profit element is deducted to reach a target cost.

Many businesses will require a minimum return from their products or services, for instance it
may be necessary for a business to earn a 40% operating profit margin. This value is calculated
and used as the deduction to reach the target cost.

The target cost therefore represents the maximum cost per unit that the business can afford to
spend, whilst earning their minimum return.

The target cost can then be compared to the expected unit cost to see if the product is viable at
present cost expectations.

If it is not, i.e. if there is a cost gap where the target cost is lower than the expected cost of
providing the service, then the business must look to reduce costs to the target cost or below to
make the service viable.

To maintain its profit margins, Crowncare would have to set a target margin and then calculate a
target cost for each of the services it provides. It would then have to evaluate the individual costs
of providing that service to see if the target cost can be achieved.

Difficulties in implementation

Crowncare offers a number of services at many different price points, from routine dental
examinations to bespoke implants.

Target costing tends to work better where products or services are standardised, as it is
reasonable to expect a standard margin and for costs to be very similar each time the service is
provided.

With more bespoke procedures, there is more discretion over the prices that are charged and
more potential variability on the costs incurred. For example, each implant is made to a template
specific to the patient, so may take different amounts of time and cost to produce each time.

Therefore, it may not be feasible to implement target costing for more discretionary treatments.

56 KAPLAN PUBLISHING