Inexp - Copy

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Analysis of Case Study: Inexperience


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Para.

No.

Problem Info Required For

Decision Making

Supplied Information Source Of Supplied

Information

Likely Source Of Missing

Information

1 Need for Cost Projection

or Prediction:

Revenue predictions are

possible through accurate

productivity measurement

techniques and systems.

But are there systems

available for cost

measurement and control?

What are the

available cost

tracking and

measurement systems

available in MGPM

manufacturers

Information is supplied only about

system available for profit

projection at MGPM.

This information is

provided in the text.

Internal cost accounting

process and manuals at

MGPM

2 Need for maintenance ofcost accounting records

To understand the cost of

each finished product there

should be system to

maintain cost records of

all raw materials.

What are the per-unit

costs of raw materials

used: cotton and

wool?

What are the volumes

of raw materials used

per unit finished

product?

What are the costs ofready-for-sale

handicraft items?

Information is supplied only about

the type of raw materials

This information is


Various accounts and

Ledgers. Cost accounting

reports and records.


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Para.

No.

Problem Info Required For

Decision Making

Supplied Information Source Of Supplied

Information

Likely Source Of Missing

Information

3 Need for rational

allocation of costs to

measure productivity of

individual functions

At MGPM there is an

urgent need to ascertain

the causes of the financial

losses. This requires

analysis ofcost-

productivity and

profitability of alldepartments

Rational procedure to

determine:

- The proper breakup

of costs.

- Measure of cost per

unit output.

- Cost variationtrends.- Methods for

controlling costs.

The rational procedure for cost

allocation involves:

- Identification of cost objects,

cost centers and cost units

- Planning of cost allocation,

apportionment and absorption in a

scientific manner.

Jaswinder Singh,

Friend of Mr.

Joginder Marwah

Missing information about

understanding of

processes and techniques

for scientific analysis and

allocation of costs can be

retrieved from cost

accounting books andmanuals as well asexperienced cost

accountants.

4 Comparison and

Justification of costs

allocated to individual

functions

In order to understand if

an individual function iscost-productive, MGPM

needs tools to analyze and

justify the costs incurred

Explanation and

justification of thecosts incurred at each

function

Function wise distribution of

common costs incurred as apercentage of the total cost

Joginders Study of

costs at MGPM

To analyze and compare

the costs incurred at afunction: comparison can

be done with industry

benchmark costs. Likely


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by each function source of such

information can be

competitor survey

/intelligence and expert

advice.

5 Accurate measurement of

per unit cost of product

In order to achieve rational

pricing of a product and

reduce the significant costs

involved in making a

product, measurement of

unit cost is important

For every product

detailed costs

involved are needed

including raw

material, labour,

machine etc.

For Handicrafts: 50% of cost is

raw material cost, 30% is salary

and labour cost, 5% is machine

cost

This information is


Techniques and methods

are needed to accurately

distribute common costs:

like utilities, storage,

transportation costs etc.

among all products per

unit. This information canbe retrieved from standardcost accounting manuals.

6 Comparison of costs of

alternative production

methods

To evaluate two

alternative production

methods based on the perunit raw material costs for

the two alternatives

To compare costs of

two alternative

production methods:accurate data about

the amount of rawmaterials involved in

the 2 alternatives and

per unit cost of these

Cost of Pasting Material:-

Alternative 1: 225*Wt + 5000-200

Alternative 2: 425*WtTherefore, if Weight of paste used

at MGPM is more than 24 Kg,then alternative 1 is cheaper. Else

alternative 2 is cheaper.

This information is


The actual amount of

pasting material used at

MGPM is not known: thisfigure can be retrieved if

appropriate raw materialusage records are

maintained in all

functions.


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raw materials is

needed.

7 Comparing in-house

production cost versus

outsourcing cost

To evaluate proposals of

outsourcing production for

some of the products as

compared to in-house

production

To evaluate proposal

of getting production

of a product

outsourced, accurate

estimate of costs

incurred with in-

house production

should be available

Using electronic components from

ME reduces warranty repair costs

by 99.5%.

New components from ME are

costlier by Rs. 17.43.

Additional fixed cost for machines

required = Rs. 5000

Saving on selling existing machine

to Mahavir Handicrafts = Rs. 575.

This information is


The percentage of

warranty repairs carried

out on dancing puppets,

average amount of the

rework costs and amount

charged per unit by

Mahavir Handicrafts for

assembling need to be

determined to evaluate theproposal. This informationwould be part of records

of customer care

department that handles

repairs.

8 Identifying variation in

fixed and variable

product costs as scale of

production and inventory

varies

To identify whether

increase in costs are in

proportion to increased

To identify whether

increasing the

production scale

Due to increased production:

Electircity bill has increased, New

unskilled workers and supervisor

This information is


The information required

for this can be found in

inventory accounts, salary


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production and to

accurately identify

inventory costs.

results in decrease in

average costs: data is

needed showing QoQ

increase in

production, increase

in variable cost

(utility, labour, rawmaterial) and change

in inventory level.

are hired, and raw material cost

has increased. WIP and finished

goods inventory has also

increased.

accounts, raw materials

accounts, inventory

accounts and sales

accounts

9 Projection of cash flow

and liquidity and

estimation of user cost of

capital

To accurately estimate thatenough cash will beavailable for operations

throughout the year even

though sales may vary

considerably.

How much workingcapital will be madeavailable by sales

over the operation

cycle and how much

debt needs to be

raised

In the first and second quarterssales are projected to fall by 8%.In the third and fourth quarters

sales are projected to grow at a

compounded rate of 38%. 86% of

the yearly export sales happen in

December. Capital is needed for

operations as well as for buying

new warehouse. There will be a

quarterly loss of interest money @

Rs. 7,50,000 if MGPMs own

funds are used.

This information isprovided in the text. To accurately know theworking capital requiredfor operations: a system is

needed to accurately

accumulate all costs data

and predict the expected

quarterly operations costs.

This system can be any

SAP system applied in the

company. This system

should also be able to

estimate quarterly capitalrequirements and costs of

alternate sources ofcapital.


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10 Selection of appropriate

product mix to maximize

profit margin and

optimizing cost of raw

materials used

To determine whether tocontinue production of low

margin products. To

identify and minimize all

controllable costs used in

these products

What is the amountof cost savings and

effect on sales of

other products if

production of

jewellery boxes is

discontinued? What

needs to be done

regarding inputs usedexclusively by

discontinued

products?

The margins on jewellery boxesare lower than those on other

products. Sales of other products

may be adversely affected if

jewellery box production is

stopped.

Margins on jewellery boxes can be

improved by reducing the quantity

of raw materials used gettingsourcing them at lower prices

This information isprovided in the text.

Improvement in marginson jewellery boxes by

varying costs and amounts

of raw materials can be

evaluated through SAP

system. If jewellery box

production is stopped,

alternative uses of the

fixed and sunk costsassociated with them must

be planned using Master

Production system.

11 Selection of appropriate

raw material processing

methods so as to yield

more of higher value

items.

To determine optimal raw

material processingmethods that yield more of

higher valued items.Segregation of skills

possessed by labour so as

The detailed cost

analysis of each stepinvolved in

processing raw jute isneeded. The market

value of three types

20% cost saving is possible with

new jute processing method. The 3types of jutes will be produced in

the ratio 30:40:30. If labourspecializes in few standard

activities it is easier to allocate

This information is

provided bycraftsman Gopal.

Detailed cost data of

various sub operations ofjute processing can again

be obtained fromappropriate SAP/cost

management system. Data


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to easily allocate labour

costs to different products.

of processed jutes is

needed to apportion

the jute processing

costs.

Data is needed fortime spend by all

labour according tothe task performed

and the product on

which it is perfomed.

labour costs to different products. of labour time spent on an

activity per product must

be available through the

time-sheet system in the

company.

12 To determine the batch

size and sales price of

orders to be fulfilled so

that the order is

profitable

To find minimum quantity

and price of premium

items to be supplied to

emporiums under a special

order so that the order is

profitable.

It is needed to findthe appropriate cost

of a unit product

when fulfilling a

special batch/order.

Also based on the

cost, appropriate

price to be quoted is

to be found.

For the special order a minimummargin of 55% is expected. The

costs to be added in the product

cost include material cost, labour

cost, overhead expenses, interest

charges @12% for internally

generated funds used in

manufacturing products, notional

warehouse rent and notional salary

of the owner.

This information isprovided in the text.

Through the SAP system,profit analysis calculation

for fulfilling an order must

be possible. For example:

min value of n can be

found by

Selling Price >=

1.55 x (average variable

cost + total overhead

cost/n)

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