When estimating future costs to establish an overhead recovery rate, full allowance for the anticipated rate of inflation should be made for the review period. Similarly, when actually quoting estimates or fixing selling prices, the up-to-date cost of materials and depreciation should
be used. To do otherwise will not result in sufficient profit being made to replace the resources consumed at today’s prices.

Further reading
Bhimani, A and Okano, H (June 1995) Targeting excellence: target cost management at Toyota in the UK, Management Accounting, June. Drury, C (2004) Management and Cost Accounting, Thomson Learning, Stamford, CT.
Glautier, MWE (2004) Accounting Theory and Practice, FT Prentice Hall, Harlow.

Self-check questions
1. Prepare a price quotation for the jobbing printer (mentioned early in the chapter) who has now received an order for 10,000 A5 menu cards. Direct materials are estimated at £180 and machine time will take three hours. All other cost and profit information is as before.
2. What size profit margin is required to give a return on capital of 30 per cent when the turnover of capital is two times?
3. What costing method is most suited to oil refining?
4. How would a local authority know if its unit cost for providing a particular service was high, low, or indifferent?
5. What two bases can be used to split the common costs of joint products up to the separation point?
6. What is the purpose of target costing?

Taken From : Accounting for Non-Accountants