Economics · Management Accounting
A manufacturing company employing Kaizen Costing sets a Target Cost Reduction amount for an existing product line. What is the most appropriate accounting treatment for the cost variance that arises if the actual cost reduction achieved is less than the set target?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The variance is absorbed by increasing the selling price of the product, thereby maintaining the profit margin.
- 2The entire cost variance is immediately capitalized as a development cost for future periods.
- 3The cost variance is treated as an unfavorable variance and analyzed to understand the root causes of the non-achievement.✓
- 4The cost variance is treated as a favorable variance and credited to the departmental profit center.
Correct answer
The cost variance is treated as an unfavorable variance and analyzed to understand the root causes of the non-achievement.
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