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SCMPE Edition Four Additions Part Two
SCMPE Edition Four Additions Part Two
DINESH JAIN
STRATEGIC COST
MANAGEMENT AND
PERFORMANCE EVALUATION
BY CA.DINESH JAIN
Disclaimer:
While every effort is taken to avoid errors or omission in this publication, any mistake or
omission that may have crept in, is not intentional. It may be taken note of that neither the
publisher, nor the author, will be responsible for any damage or loss of any kind arising
to any one in any manner on account of such errors or omissions
In order to response proactively to the unfortunate possibility of wide-spread of Novel Corona Virus
(COVID-19) in the country, the ministry of public health and welfare appeals all the surgical product
manufacturers to scale-up and speed-up the production of surgical products which are useful for protection
from contamination and useful for medical professionals.
GSPL is the oldest manufacturer of surgical gloves and face masks. GSPL is manufacturing only KN95
virus protection face mask (KN95) with particulate filtration efficiency more than 95%, which is approved
by the regulator and ISO certified. KN-95 masks also recommended by WHO as standard equipment for
safeguard. GSPL decided to charge the price of Rs.90 for KN95 which is on the lower side to average price
charged by other competitors ranging between Rs.100-105. The cheaper face masks (blue colour, 3 layers at
Rs.5-10) are also available for the customer but they are not with the feature which KN95 provides.
Marketing division used to highlight the following features of KN95 produced by GSPL, but these features
more or less similar to competitor’s product –
• Flat fold design for easy storage.
• Excellent filtration performance (clinically tested that filtration efficiency is more than 95%).
• Made of high quality thick 5-layer material.
• With exhalation valve.
• Washable (every mask manufacturer in the market claims this feature, but fiber significantly fell
weak after wash which deteriorates efficiency. KN-95 has clinically proven result in its favour that
even after a wash, if dried in sunlight for 5 minutes it will be resorted to using with the same
efficiency as of new mask).
• With adjustable nose clip & self-elasticated ear loops.
With passage of time, condition worsen than expected, hence government relies upon the import of surgical
equipment, but COVID-19 related conditions within such countries (from where surgical equipment
including masks are imported) also turns unfavourable hence they impose a temporary ban on the export
of surgical equipment including mask. The government again urges domestic surgical equipment
manufacturing companies to produce more and more such equipment. In order to motivate these
manufacturers, the Ministry of finance came-up with schemes of easy credit, credit without guarantee,
interest subvention and moratorium, and exemption from statutory contribution and deferment of duties,
and taxes. The government is promoting the use of a home-made mask too.
Dr. Angel Gupta who is CEO of GSPL called a meeting of division heads, including ‘Face Mask Division
(FMD)’ to look into opportunities emerging out of the present PESTLE scenario, and what GSPL can do to
seize them with the purpose of enlisting core-competencies require and currently possessed. FMD is
equipped with the latest technology and skilled staff who manufacture the KN-95 mask.
In such a meeting division head of FMD proudly mention that currently, they are producing one lac masks
on monthly basis. He mentioned it is needless to say, we can sale even if produce more than this. He also
briefs both the processes performed by FMD which are –
Cutting and spun bonding - Inner and outer fiber layers are cut-down and spun bonding using nozzles
blowing melted threads of a thermoplastic polymer (polypropylene) to layer threads between 15-35
micrometres, which build up into cloth performed
Stitching and finishing - The outer and inner fiber layers are bonded with output of spun bonding process
using thermal techniques and then nose clip welded using mechanical techniques.
He also furnished the below-mentioned information pertaining to current operation aspects of these two
processes –
Particulars Cutting and Spun Bonding Stitching and Finishing
Monthly capacity (in units) 1,15,000 1,00,000
Material cost per unit (in Rs.) 40 -
Other operating cost (in Rs.) 10,00,000 6,00,000
FMD follows throughput accounting, hence material cost incurred during cutting and spun bonding
operation is the only variable cost. CEO wish to scale-up the level of capacity and production. She collected
a bunch of ideas from division heads and the innovation team. She is from a medical background hence
prior to furnishing a proposal to the board; She decided to check validity and viability with help of expert
opinion/advice on the following available options–
i. Installing a machine costing Rs.2 lacs, which will auto-cut the fiber sheet into requisite space, it will
enhance the monthly capacity of cutting and spun bonding by 10% to the current level.
ii. An automatic thermal bonding machine can be used which is expected to enhance the monthly
capacity of stitching and finishing operation by 20,000 units. Such a machine is available as a
monthly lease rental of Rs.6 lacs.
iii. An outsourcing agency offer to perform the cutting and spun bonding at a rate of Rs.6 per unit if
the order size is less than 10,000 units, and at a rate of Rs.5 per unit of the order size is above 10,000
units. The maximum monthly order which such agency can serve is 20,000 units
iv. The same outsourcing agency also offers to perform stitching and finishing process but with a
maximum limit of 12,000 units during months period. For this, they will charge a uniform rate of
Rs.15 per unit.
In the same meeting the Quality Head mentioned that 1,000 units of KN-95 produced are found defective,
which neither can be sold (even at subsidies rate) due to strict guidelines by the regulator nor can be
reworked/ reprocessed. CEO is curious to know the loss if a defect is discovered at end of the cutting and
spun bonding process/ at end of the stitching and finishing process.
Required:
You are chief management accountant of GSPL. CEO asks you to draft a report addressing her with
ADVISE on–
(i) Assessment of opportunities available for GSPL (considering its current strategic position), while
countering the related threats.
(ii) Core competencies, which GSPL possess and can be exploits as Critical Success Factors to gain
competitive advantage.
Automation related:
• Auto cutting of fiber sheet: The cutting and spun bonding the process is not bottleneck activity,
thus has spare capacity of 13,850 units after excluding defective products, it’s not making sense to
automate the process to enhance capacity further. Hence it not advised to install the machine.
• Automatic thermal bonding machine: Since the stitching and finishing process is the bottleneck
activity, and operational at full capacity, hence any option to enhance capacity for which demand
is available in the market at price more than relevant cost to be incurred; must be accepted. Since
there is net monetary benefit of Rs.92,500 (see table below), hence taking automatic thermal
bonding machine on lease is highly advisable
Outsourcing related:
• Cutting and spun bonding process: The cutting and spun bonding process is not a bottleneck
activity, thus already has spare capacity of 13,850 units, it’s not making sense to outsource some of
the unit to enhance to capacity further. Given become irrelevant in case. Hence it not advised to
outsource.
• Stitching and finishing process: Since the stitching and finishing process is the bottleneck activity,
and currently operating at full capacity, hence any option to enhance capacity for which demand
is available in the market at a price more than the relevant cost to be incurred; must be accepted.
Since there is net monetary benefit of Rs.4,20,000 (see table below), hence outsourcing of 12,000
units for the stitching and finishing process is highly advisable. Non-monetary implication of
outsourcing can be considered.
Particulars Calculation Amount
Incremental revenues 12,000 x 90 10,80,000
Less: Raw material cost 12,000 x 40 -4,80,0000
Less: outsourcing cost 12,000 x 15 -1,80,000
Net Benefit 4,20,000
Note: Cost of defective units can also be adjusted in above working note
If the defect is discovered at the end of cutting and spun bonding process:
• Against the 1,000 units of KN-95, which found defective at end of cutting and spun bonding
process, material required to produce another 1,000 units of KN-95 shall be introduced to the
cutting and spun bonding process; because cutting and spun bonding process has a spare capacity
of 15,000 units beyond the current level of production (Cutting and spun bonding process has a
capacity of 1,15,000 units against the current production of 1,00,000). Hence additional 1,000 units
can be processed but this cause cost equal to material cost (the only variable cost).
• Hence in this way amount of loss will be Rs.40,000/- i.e., (1,000 units @ Rs.40 each)
Considering the expected registrations, Director BoS signed the requirement to print 1000 set and send the
same for approval of Chairperson’s office. In meantime government came-up with notification that grant
and aids to NLI will be dispensed and NLI shall stand-out as autonomous and self-financing institute.
Chairman is concerned with cost efficiency and consider printing is neither a value -generating nor strategic
activity for NLI, hence it is beneficial to outsource printing of study material; if economically cheap. Hence
on office order to advertise for e-tender signed by chairman, copy of which sent to governing body.
Mr. Gurumurthy, one of members of governing council oppose chairman stating what about the quality
and confidentiality. Mr. Vyas, another member also argues that cost of in-house printing will also come
down due to learning curve, but out-source supplier will keep on charging same price. Chairperson
mentioned that during recent days, while reading about pros and cons of outsourcing contracts; he read
about Gain Sharing Arrangement (GSA). He further mentions a GSA clause shall be inserted in outsourcing
contracts, but Mr. Vyas highlight the high failure rate of GSA; whereas some other members said they don’t
know GSA actually means.
Against the tender, an out-sourcing proposal from ‘Janta Press’ is also received in which they offer to print
1000 set at a total cost of INRs 14.50 lakhs. The cost include insurance and freight till delivery at NLI stores.
Royalties are still to be paid by NLI to authors but at time of sale of set. Janta Press is in same business for
last 20 years and renowned for quality. Janta Press is also awarded by local government and other agencies
for using 100% recycled paper.
Required
You are working in the finance department as a management accountant. Chairperson asks you to
(i) Evaluate the outsourcing proposal from ‘Janta Press’ and advise the governing body whether the same
shall be accepted or not.
(ii) Considering the facts mentioned in the case study and argument raised by the members of governing
body, identify to high-light and evaluate the non-monetary aspects of the outsourcing (the printing of 1000
set of study material to ‘Janta Press’) to draft a case
(i) For, and
(ii) Against
(iii) Advise governing body why do GSA fails and what NLI can do to make gain sharing clause work
effectively
Answer:
Part (i):
• The NLI shall not accept the outsourcing proposal from ‘Janta Press’ to print 1,000 sets of study
material of the revised certification course. The costs relevant to outsourcing decision shall only be
that cost which can be avoided by accepting out-sourcing proposal.
• These costs have cost on account of direct material, direct labour, variable overheads excluding the
royalty because same is still need to be paid by NLI, and avoidable portion of fixed overheads
(absorbed on printing of such 1,000 sets).
Part (ii):
Non-monetary aspects which are in favour of the outsourcing (to Janta Press)
• NLI can focus on value-generating activities: Value-generating activities are of utmost importance
and capable of giving competitive advantage. In case of NLI the candidates are customer who are
ready to enroll in the revised certification course because now the course has enhanced coverage
with quality content which is more relevant to current scenario. Hence activities which capable to
generate value for customer are coverage of course, the quality of content, and relevance. By
outsourcing of printing job NLI can enhance the focus on such value-generating activities.
• TBL effect: Since the outsource contractor Janta Press is awarded by local government and other
agencies for using 100% recycled paper hence outsourcing to Janta Press will improve the
environment footprint of NLI
• Experience of Janta Press and reputation: Since Janta Press is in the business of printing for the
last 20 years and renowned for quality. Hence NLI may relax in reference to quality, moreover
experience in the printing of 20 years; itself an assurance factor that the learning curve at Janta
Press is quite mature, which convert processes into SOPs (Standard Operating Procedures
• Confidentiality is not an issue: Since is of printing of Study material, which is the intellectual
property of authors for which they are honored with royalties; hence the copyrights of content is
reserved with authors. So a breach of confidentiality of content will cause civil as well as a
criminal liability on part of Janta Press
• Gain Share Arrangement clause can be inserted in outsource contract: Typically gain sharing
clause requires the outsource contractor to present technology improvement or cost-saving ideas
to the client (throughout the life of the outsource contract). Because some of these ideas may reduce
the outsource price, as per clause a portion of the financial benefit will be shared with client. Hence
in this case NLI can ask for insertion of GSA clause in the master services agreement
Non-monetary aspects which are against the outsourcing (to Janta Press)
• Reliability of outsourcing contractor to meet timelines (timely delivery) and continuity:
Continuous and timely availability of supplies is important in every business, NLI is not an
exception to this; hence the reliability of outsource contractor to meet timelines (timely delivery)
and continuity critical factors.
• What to do with staff and spare capacity: Outsourcing will obviously result in spare capacity at
printing division and also result in employees/workers who are not engaged now (if they are
regular employee/worker). The following are two critical decisions which are resultant out of
outsourcing and may cause a great un-rest;
o Whether those staff will be engaged somewhere else or retrenched?
o Will it impact the motivation of other employees?
• Establishing co-ordination with outsource contractor: NLI need to establish coordination with
Janta Press for drafting and signing agreement then execution of same (in term of placing order,
printing as per instruction, conducting inspection of inward supplies, processing invoices and
making payments, etc.), which may cause a bit extra effort and resource. A SPOC (single point of
contact) is also needed to designate at NLI to co-ordinate will Janta Press.
Part (iii):
Gain-sharing Arrangement – Failure and Check-points:
• Gain-sharing arrangement leads to win-win situation hence becoming increasingly popular. In
the outsourcing contracts the client is willing to insert continuous improvement clauses to
capitalise on learning curve and process improvement through technology up-gradation etc. and
outsource contractor (service providers) also find the same as great selling point. So, gain sharing
arrangement is a contractual understanding where the client (NLI) and outsource contractor (Janta
Press) agree to share gains (measurable financial gains) as a result of continuous improvement or
innovation
Required:
• ADVISE on:
o Acceptability of the company regarding implementation of the Just in time procurement
system.
o Necessity of overtime cost be incurred to reduce Stockout.
• RECOMMEND factors that the management needs to consider before implementing the just in
time procurement system.
Answer:
WN 1: Computation of cost of procurement in JIT vs existing system:
Particulars Existing System JIT System
Material cost 20,00,00,000 22,00,00,000
[2,00,000 x 1,000] [2,00,000 x 1,100]
Inventory holding cost 70,00,000 -
Insurance cost 1,40,00,000 -
Overhead cost 20,00,000 -
Stock-out cost
Stock-out of 1,500 units - 20,00,000
(Note 1)
Stock-out of 2,500 units - 41,25,000
(Note 1)
Total relevant cost 22,30,00,000 22,61,25,000
“If someone asked me to suggest a basic procedure for solving problems scientifically, rationally,
efficiently, and effectively by removing the barriers and reducing the wastes – KAIZEN may be the best
possible answer”. This is the opening remark of the CMD of Sanjivini Hospitals at the recent board meeting,
after which a clear split in the viewpoint of directors over the utility of Kaizen is visible; some of the
directors favour the organisation-wide innovations wherein top management’s active involvement is
essential; whereas some others believe performing those improvement initiatives which can be applied
through an operational level workforce with the little amount of resources are essential.
The executive director responsible for planning and operation read an executive summary followed by a
presentation wherein the facts and figures related to operations were highlighted. In response to a question
raised by the independent director regarding the proper disposal of surgical wastes, he mentioned that
during the year (just completed) colour coding was used throughout where it was possible, after
considering a suggestion letter from a nurse, and this significantly prevent mix-up of medical wastes, which
make disposal easy and cheap. The head of housekeeping division added, on the feedback from ward boy,
all switches were labelled to save energy and cost on the environment day.
CEO, gave stress upon the clarifying ideal situation because he feels it is useful to identify problems in your
working place, because the gap between ‘desired ideal status’ and ‘actual current situation’ is
‘problem/(s)’. He further added, – “if the problems are complex and composite then the Kaizen process
with help of the PDCA cycle needs to be practiced; if the problem is simple and relates to operations then
Kaizen initiatives can be clubbed with 5S”. He mentioned both the ways have their own importance at
Sanjivini Hospital in order to respond to MUDA (waste).
In favour of the Kaizen initiatives that can be clubbed with 5S, the CMD argues “these are quick and easy
and helps to eliminate or reduce waste”. The HR (executive director) head supports the CMD by stating
that “it promotes personal growth of employees and the organization and also act a barometer of
leadership”. The finance head (who is also an executive director) supported the CMD by stating that “these
ideas (small changes) can be implemented by the worker him/herself with very little investment of time”.
The finance head also quoted a reference of the report that was published in The New Indian Express
recently, stating that private hospitals spend 50 percent of operational costs on salaries of medical staff,
including doctors. The analysis says that hospitals spend 2832 percent on drugs and consumables and
maintaining a bed in a super-specialty hospital takes about Rs.15,000-25,000 every day.
Then he (finance head) presented the following facts and figures in front of the board– During the previous
period (t-1), at Sanjivini Hospital the average bed capacity was 350 and the average overall actual operation
cost for a week of seven working days was Rs.4,59,37,500 against the standard cost of Rs.18,500 per bed per
day. During the period just ended (to) with the Kaizen initiatives the goal of cost reduction was 8%. The
average bed capacity increased by 10% and the average overall actual operation cost for a week of seven
working days was Rs.4,63,54,000 against the standard cost of Rs.17,020 per bed per day.
Required:
i. Assist the management of Sanjivini Hospital to CALCULATE the following, using Kaizen Costing
a. Cost base for the period just ended (t0)
b. Kaizen Cost reduction target during the period just ended (t0) in amount
c. Cost base for the period just started (t1)
ii. ASSESS the performance of Sanjivini Hospital for the period just ended (t0) from the perspective
of Kaizen Costing.
iii. After briefly explaining Kaizen and the 5S and IDENTIFY at-least three practices adopted by
Sanjivini Hospital wherein Kaizen overlaps with 5S activities.
iv. ADVISE the management at Sanjivini Hospital, how it can track the Kaizen suggestions.
v. After stating the Kaizen process, do synthesis of the relationship between the Kaizen process and
PDCA Cycle.
Answer:
Part (i): Computation of cost base:
4,59,37,500
Cost base for period just ended = = Rs. 18,750 per bed per day
7 x 350
Cost reduction target = 18,750 x 8% = Rs. 1,500 per bed per day
4,63,54,000
Cost base for period just started = = Rs. 17,200 per bed per day
7 x 385
Note:
• Cost base would basically refer to actual cost of previous period
Note: Standard cost is irrelevant from the point of view of kaizen costing
Sanjivini Hospitals can use the KAIZEN suggestion board in the following way (steps)–
• Write the idea on a paper and stick it when you come- up with ideas for improvement.
• Move the paper to “TO DO” when a supervisor or work improvement team are discussing.
• Move the paper to “Doing” when you are practicing the ideas after agreement from the supervisor
or work improvement team.
• Move the paper to “Done” when you complete the ideas
Do
Plan
Check
Act
of Kaizen Theme Implementation effectiveness of Standardization
Step 2: Situation of the identified the of effective
Analysis countermeasures countermeasure countermeasures
Step 3: Root
Cause Analysis
Step 4:
Identification of
Countermeasure
Part III – 5S
In the plant, safety became a critical issue. This is also evident from the report of the review committee,
which was submitted to the board of directors recently. Report details all those incidences (that occurred
in the last couple of years) when safety norms were breached or safety measures in operation were failed
and result in incident or accident.
Total such incidences are 54, out of which major are 11. Results of detailed investigation show that 14 such
incidences were taken place due to sheer negligence of workers (it was also identified that 4 of such
incidences occurred while the concerned worker was during overtime hours), whereas 37 incidences taken
place due to poor workplace management and the remaining 3 are due to power failure.
Out of 37 incidences that took place due to poor workplace management, 19 were due to using either the
wrong tool (tool required either misplaced or non-accessible due to any reason) or hazardous/ toxic
elements were not handled properly including failure to keep the process within the control limits (2 were
serious, but no causality); 5 were due to breakdown or failure of machines (4 were serious, and the one
incident resulted in a fire resulting in two casualties and injuries to many). It was also identified that all the
5 machines involved were not regularly cleaned and even regarding one of such machines a complaint
(that it sparks some time) was also registered by the operator with maintenance staff (same remain
unresolved). The remaining 13 were due to cluttered production floor (1 among them were serious,
involving one casualty and injuries to some others).
VP Finance after reading the report sent a letter to the board, wherein immediate action is requested. He
included the adverse monetary effect of such incidences in the letter.
During the next board meeting, wherein you (management accountant) are also present; an independent
director who is an HR professional said ‘the consequences of such incidences include defame and low
BHARADWAJ INSTITUTE (CHENNAI) 16
STRATEGIC COST MANAGEMENT CA. DINESH JAIN
employee morale (apart from litigation and pressure from employee unions), hence resolution shall be
prompt and apt.
The CEO responded ‘BSC (balanced scorecard) is already in practice at Santnagar plant of Mijaj, which
includes Internal Process, and Learning & Growth, the score is also acceptable in both the perspective’. A
question was posed related to accidents due to employee negligence are they (employees) learned enough?
CEO while responding to question referred report from the HR head, wherein it was mentioned that during
such two years 27 training programs were organised and average attendance turned out nearly 80%. Every
employee who works on the production/assembly line has to undergo 3 months of training at the time of
joining.
The MD expresses his concern over the number of such incidences and surprised to know that BSC is failed
to deliver. MD prior to this board meeting, attended a CPE meet wherein he comes to know about 5S, red
tag, and marking; but not sure whether these will help or not. MD ordered you to prepare documents
showing the application of 5S to the Mijaj’s Santnagar plant, apart from preparing the precise checklist and
list of benefits owning to different ‘S’. It was decided a task force of the director and top executives shall be
formed to respond to the issue.
Required
(i) EXPLAIN the 5S briefly followed by a piece of information to the task force on ‘is the root causes of
incidences that took place due to poor workplace management are connected with the scope of 5Ss?’
Support your answer by correlating the facts given in the case and highlight how 5S can be helpful to Mijaj.
(ii) You prepared the document as desired by MD and gave it to the computer operator to punch in, but
she merged the checklist and list of benefits as follows–
a) Working out the procedures defining the course of processes.
b) Are lines, pipes, etc. clean, will they demand repairing?
c) Quick informing about damages (potential sources of damages.
d) Do tools or remainders of materials to production lie on the floor (in the workplace)?
e) Has the floor any irregularity, cracks, or causes other difficulties for the operator’s movement?
f) Are the oil’s stains, dust, or remains of metal found around the position, machine, on the floor?
g) Better usage of the working area.
h) Are pipe outlets of oils not clogged by some dirt?
i) Shortening of the time of seeking necessary things.
j) Is attention given to keeping the workplace neat and clean?
k) Decreasing of mistakes quantity resulting from the inattention.
l) Is the position (location) of the main passages and places of storing clearly marked?
m) Are all transport palettes stored on the proper heights?
You are also required to CLASSIFY (and re-arrange) in relevant categories of 5S.
(iii) LIST, why do balanced scorecard fails to deliver in all the cases? Critically ASSESS the CEO’s response
to the question posed.
(iv) EXPLAIN taskforce, for what purpose red-card/tag is meant? How is it used? Are there any other
colours tag too?
Answer:
Part (i):
• 5S represents a scientific way of workplace management so that work can be performed
effectively, efficiently, and safely. 5S is usually considered as an essential component of Lean
manufacturing, and the foundation of eight pillars of TPM
• 5S consists of Sorting, Set-in-order, Shine, Standardization and Sustain
• Yes, the root causes of incidences that took place due to poor workplace management at the
Santnagar plant of Mijaj are highly connected with the scope of 5Ss.
Part (ii): Classification of checklist items and benefits in relevant categories of 5S:
Description Checklist/Benefit Category
Working out the procedures defining the course of processes Benefit Seiketsu
(Standardize)
Are lines, pipes, etc. clean, will they demand repairing? Checklist Seiso (Shine)
Quick informing about damages (potential sources of Checklist Seiso (Shine)
damages.
Do tools or remainders of materials to production lie on the Checklist Seiso (Shine)
floor (in the workplace)?
Has the floor any irregularity, cracks, or causes other Checklist Seiri (Sort)
difficulties for the operator’s movement?
Are the oil’s stains, dust, or remains of metal found around the Checklist Seiso (Shine)
position, machine, on the floor?
Better usage of the working area. Benefit Seiri (Sort)
Are pipe outlets of oils not clogged by some dirt? Checklist Seiso (Shine)
Shortening of the time of seeking necessary things. Benefit Seiton (Set-in-
order)
Is attention given to keeping the workplace neat and clean Checklist Seiketsu
(SoPs)? (Standardize)
Decreasing of mistakes quantity resulting from the inattention Benefit Shitsuke (Sustain)
Is the position (location) of the main passages and places Checklist Seiton (Set-in-
of storing clearly marked? order)
Are all transport palettes stored on the proper heights? Checklist Seiton (Set-in-
order)
Note- Alternate Classification may also be possible.
Part (iii):
The prominent reasons for the failure of a balanced scorecard to deliver in all the cases are–
• Managers mistakenly think mere use of non–financial measures and Balanced Scorecard is meant
for reporting purposes only.
CEO's remark includes a reference to report from the HR head, wherein it was mentioned that during such
two years 27 training program was organised and average attendance turned out nearly 80%. Since
learning is something more than training; hence conducting training program will not be enough, if
participation and learning of worker are not assured. Physical attendance will not ensure the learning, for
this worker need to be engaged and they shall be motivated to practice what they learn during training.
Part (iv):
• Red tags help to identify objects that need to be removed from the workplace, in the process of
sorting.
• How it works: While sorting, place a red tag on the undecided items. This lets everyone know this
item needs to be evaluated. Write on the tag whenever item used afterward that, this will help in
deciding the frequency of use and take the decision to leave the item where it was originally placed,
relocate the item, or dispose of the item.
• Note - Until determining their value, such red-tagged items are placed in the Red Tag Holding
Area.
• Yes, apart from the red tag, another tag that can be used is the yellow tag. A yellow tag contains
detailed information (including expected use, dates, etc.) of needful items, which are useful but
not required currently, hence usually kept in store
Part IV – TPM
The processes at SEL were traditionally designed and hardly modified since its inception. Accounts payable
function (process) is also not an exception and requires rationalization. It’s not only the obsession of
managers but also the fear of workers; that hinders the SEL from revamped even to make minor changes.
The CEO, who joined SEL recently, presided over a meeting where all the functional heads (including
finance, marketing, and store, etc.) were present. Highlighting the concern of vendors, the CEO remarked
‘If managers have the vision, re-engineering will provide the way’. Many functional heads were unable to
understand what the CEO intended to say, especially ‘what he meant from the word reengineering? Is this
meant by improvement or innovation?’
VP-Production and Operations raised his concern over the identification criteria for processes to be
rationalised. VP-HR and Payroll jumped into the discussion with the plausible conflicts and challenges out
of the changes, SEL aiming at. CEO stressed the importance of ‘breaking away from the old rules’
Required:
You were also present in the meeting (as management accountant), hence required to
Part (ii):
Difference between Process Improvement, Process Redesign, and Process Re-engineering
• Process Improvement targets to tap incremental improvements, while keeping the process stable
(in relative term to process redesign and process re-engineering), whereas Process Reengineering
involves radical redesigning of core processes
• Process Redesign is the middle path to both the extremes (Process Improvement and Process Re-
engineering).
Process Improvement Process Redesign Process Re-engineering
Process is stable Process has big problems and Strategic opportunities or
needs to change environmental threat (process
needs to be re-vamped)
Smaller sub-process Mid-sized process Core process (using value chain)
Part (ii):
Target costing improves profitability in two ways
• It places continuous emphasis on product costs throughout the life cycle of every product, and
the management is completely aware of costing issues since it receives regular reports from the
management accounting members of all design teams.
• It improves profitability through precise targeting of the correct prices at which the company
feels it can field a profitable product in the marketplace that will sell in a robust manner. This is
opposed to the more common cost-plus approach under which a company builds a product,
determines its cost, tacks on a profit and then does not understand why its resoundingly high price
does not attract buyers. Thus, target costing results not only in better cost control but also in better
price control.
If any organisation constantly issues a stream of new products, or if its existing product lines are subject to
severe pricing pressure, it must make target costing a central part of its strategy. If the shortcomings of
target costing are dealt with by a management team, it will find that target costing is one of the best
management accounting methods available for improving profitability
Production Process:
Following is the information available about the production plan and standard costs based on budgets:
• Product Mix: The input mix to produce corrugated cardboard sheets is as below:
Material Product Mix Market price per Ton
Kraft Paper 80% 50,000
Recyclable Paper 20% 20,000
• In put Output Yield: A ton of raw material processed in the corrugators yields half ton of cardboard
sheets (corrugated).
• Operating Costs: A corrugator machine can process 5 tons of cardboard sheets during an hour long
production run. Operating cost of the machine for one hour is Rs.30,000.
• Printing Costs: Cost of printing customized information and colour/ design costs Rs.5,000 per ton
of cardboard sheet.
• Other costs required to complete the manufacturing process (Inc. glue, dyes, and wax) is Rs.20,000
per ton of cardboard sheet.
These standards represent “best practices” for the company that have been followed for the past many
years. Standard costs are revisited once every year since it is not possible to do more dynamic costing due
to the 35 different types of cartons being produced. This is acceptable both to the production manager and
the senior management of the company. Accordingly, the total standard cost computed from the above
inputs is acceptable for evaluation of the manufacturing performance.
Storage
PX-2 receives and stores raw material within factory premises. It has a warehouse located 20 kms from its
factory where finished corrugated cardboard sheets (cartons) are stored. Shipment of goods from factory
to warehouse is made using trucks that the company owns. Later, based on the demand, shipments are
made from the warehouse to electronic product/(s) manufacturers all over India. Stacking, dispatching,
and shipping of goods is done manually.
Financial Performance
PX-2 sells each ton of carton at Rs.1,40,000. In addition to the manufacturing costs detailed above, following
costs are incurred:
• Shipping of goods to the warehouse 20 kms away is Rs.6,000 per ton.
• Warehouse maintenance expense is Rs.30,000 per ton.
• Required profit margin of finished corrugated cardboard sheets (cartons) is Rs.5,000 per ton.
A back-of-the-envelope calculation indicates that the cost of operations is actually higher than this sales
price. Since the market is highly competitive, PX-2 does not have the flexibility to increase its sale price.
Problem at hand
A close competitor of PX-2 is able to sell similar cartons at Rs.1,10,000 per ton. There is not much product
differentiation between the goods. A “competitor-study” indicates that the competitor is making
reasonable return even at this price. Likewise new entrants are eating into PX-2’s market share. On the
production side, the production management team is convinced that they have the best practices in place
and that the costs being incurred are reasonable. The loss making financial performance, in their opinion
is due to market pricing of the product. On the other hand, the sales manager is of the opinion that given
the market competition, the product cannot be sold at any higher price. Hence, the loss cannot be addressed
by increasing the sale price.
(ii) Intense market competition and the ability of a competitor to sell a similar product at a much lower
price, requires you to use target costing methodology to solve the problem. Taking the competitor’s sale
price of Rs.1,10,000 per ton CALCULATE the target manufacturing cost.
(iii) In the current set-up, CALCULATE ideal manufacturing cost considering most efficient use of
resources. Ideal manufacturing cost is when there is no wastage of current resources.
(iv) What conclusions would you draw when you the target manufacturing cost and the ideal
manufacturing cost? [Hint: ADVISE].
(v) ASSESS whether the company return improve its profitability when the following actions are taken:
(a) The product input mix is changed as kraft paper 55% and recyclable paper 45%. Market price per ton of
kraft paper is now Rs.51,000 and of recyclable paper is Rs.15,000.
(b) Input output yield improves to 85% from the current level of 50%.
(c) Storage of finished goods at the warehouse is being improved. The company is moving to a smaller
warehouse within the same vicinity. Automation of stacking and dispatch operations will be done using
forklifts. Storage space is being optimized by stacking the goods on racks that can store more volume within
the same floor space. This can reduce warehouse operating costs by Rs.5,000 per ton.
(d) Trucks used for shipping are being replaced by more fuel efficient, larger ones. This would save the
company Rs.2,000 per ton.
(vi) COMMENT on how the above target costing study has made PX-2 environmentally responsible.
Answer:
WN 1: Computation of current manufacturing cost and profit:
Particulars Calculation Amount
Raw Material cost [(50,000 x 0.80) + (20,000 x 0.20)] 88,000
0.5
Operating costs 30,000 6,000
5
Printing costs 5,000
Other costs 20,000
Manufacturing cost per Ton 1,19,000
Shipping cost 6,000
Warehouse maintenance expenses 30,000
Total cost per Ton 1,45,000
• At the current sale price of Rs.1,40,000 per ton, the company is incurring a loss of Rs.15,000 per ton
of cartons produced.
How has implementation of recommendations from the target costing study made PX-2 more
environmentally responsible?
Different Costs:
i. Evaluating and picking pollution control equipment
ii. Performing contamination tests
iii. Creating environmental policies
iv. Audit of environmental activities
v. Improved systems and checks in order to prevent fines / penalties
vi. Environmentally driven R & D
vii. Failure in disposing toxic material
viii. Cost of restoring land to its natural state
Answer:
Cost Type
Evaluating and picking pollution control equipment Environmental Prevention Costs
Performing contamination tests Environmental Appraisal Costs
Creating environmental policies Environmental Prevention Costs
Audit of environmental activities Environmental Appraisal Costs
Improved systems and checks in order to prevent fines/penalties Environmental Appraisal costs
Environmentally driven R&D Environmental Prevention Costs
Failure in disposing toxic material Environmental Internal Failure
Costs
Cost of restoring land to its natural state Environmental External Failure costs
Management of the hospital have following projections for the upcoming year:
• Variable cost will go up by 10%
• Fixed cost will increase by Rs. 68,00,000 per annum.
• Salary of the nursing staff and charges from patients will remain same. The number of patients is
also not likely to increase in the next year.
The management is considering to open an ICU instead of above mentioned Healthcare Unit which will be
at par in initial 2 years but earn profits after that. ICU will also increase goodwill and social reputation of
the Hospital.
You are required to:
(i) PREPARE statement to show profitability of existing Healthcare Unit for 2022 and upcoming year.
(ii) Break Even Bed Capacity on the basis of projections for upcoming year.
(iii) Your ADVICE on the basis of Financial as well as Non-Financial Factors to switch off from Healthcare
Unit to ICU.
(Note: Nursing staff salary will be taken as Fixed Cost.)
Answer:
WN 1: Statement of Profitability:
Particulars Current year Calculation Next year
Sales 5,10,00,000 5,10,00,000
2,10,00,000
[( ) + 10%] x 12,000
Less: Variable cost (2,10,00,000) 12,000 (2,31,00,000)
Contribution 3,00,00,000 2,79,00,000
Less: Fixed cost (1,22,40,000) 1,22,40,000 + 68,00,000 (1,90,40,000)
12,000
Less: Nursing staff (57,60,000) ( ) x 2,40,000 (57,60,000)
500
Profit 1,20,00,000 31,00,000
Note:
5,10,00,000
No of patient days = = 12,000 patient days
4,250
Advise:
• There is significant drop down in profitability of Healthcare Unit. This drop down in coming year
indicates that from the financial perspective the operating of healthcare unit is not a viable
option. However, based on information given, operating an ICU is a lucrative project in-spite of at
break even in coming two years.
• More than this ICU will increase goodwill and social reputation of the hospital. A good reputation
is an important asset for healthcare providers. Along with credible market positioning, it is vital
for attracting self-reliant, quality-conscious, and cost-aware patient segments. In long run certainly,
it will be worthwhile. Therefore, it is advisable for SMS Healthcare to switch over from Healthcare
Unit to ICU
The product engineer explained to you that the toner cartridge is the container that holds the toner powder.
The drum unit is an electrically charged cylinder that fuses that toner powder onto paper to create text and
images. Based upon the estimates of the marketing department regarding the number of printers to be sold
in the upcoming year, the production head estimates the consumption of 40,000 units of D32. The cost clerk
in the accounts department, provided you with the following information (annual, actual till 24th march
and budgeted for a remaining week) pertaining to D32 for the year just about to end.
You are crunching the numbers to advise the management, in meantime come across VP-Production who
indicates producing D32 in-house will become cheaper in the upcoming year because the production cost
will reduce significantly on account of the initiative proposed instead of an increase in it (as quantified by
you). Hence advise you to analyse the decision ignoring the increase in the cost of production rather advise
to consider them at a level lower than the current level. Basically, his pain is something else, he detests to
see the scope of his work at Capson is getting dwindled and don’t want the apple of his eye to be laid–off.
Required
(i) ADVISE the Board, whether to outsource or to produce D32 in-house.
(ii) You know it is nearly impossible to attain the cost reduction as described by VP Production in the case
of in-house production of D32, but you are also dejected afterthought of possible lay-off which largely
depends upon your advice. How you RESPOND to the dilemma.
Answer:
Part (i):
WN 1: Computation of relevant cost of making the product:
Particulars Calculation Amount
Direct Material 33,97,500 40,01,500
[ + 6%] x 40,000
36,000
Direct Labour 16,47,000 19,21,500
[ + 5%] x 40,000
36,000
However, prior to make any decision management should consider the following non-financial
considerations also–
• Reliability of outsourcing vendor in terms of–
o Quality of D32: The quality of D32 delivered by outsourcing vendor must be at par or
better than the quality achieved from in-house production.
o Continuous and timely supply of D32: Supply of D32 shall be continues and on time as
per production schedule, else haphazard supply can obstruct the production schedule and
deliveries as Capson.
o Ability to supply entire requirements: There is a requirement of 40,000 unit of D32 at
Capson, the outsource vendor must be capable and ready to supply the entire need of
40,000 units (only then lease rentals can be saved)
Part (ii):
Response to the dilemma
On investigation it was found that the main reason of delay is mobile phones of staff. Staff spent their
valuable time on mobile phones however staff uses his or her mobile phones for 2 to 3 minutes at a time
but frequency is high. As a result, on an average daily every staff member spends 1/2 hour to 1 hour on
receiving personal calls and on social media. It looks just a small issue but its effect is large as it also diverts
their minds from their ongoing work also.
As it is a consultancy firm, it is not possible for staff members to work without phones because they have
to converse with client's officials time to time and clients also calls them to tell their additional requirements
and feedbacks.
To resolve this problem, management has decided to provide landline phones. Now staff members have
to submit their mobile phones at reception and they are not allowed to take them at their workplace. Staff
members are advised to use landline phones and firm mailid to contact the clients. As per management
opinion it will improve their efficiency up to 25% but there are some issues in which management wants
your opinion
(i) Whether clients will be compatible with such type of arrangements?
(ii) Will it affect the morale of staff members and will it affect long term sustainability of firm? Give reasons
Answer:
Part (i):
• Use of mobile phone devices in office for personal calls distract the work and even result in
decreased productivity. Therefore, landline phones could be the option. Clients may be
compatible with such type of arrangements but what about after office hours or there may be a
situation which need immediate resolutions even most of the times senior officials were in
meetings or outside the office. Therefore, installation of landline phone is depending on the cadre
of staff and may have restricted use
Part (ii):
• Surely, it will affect the morale of staff since their family members or relatives won’t be able to
contact them in case of an emergency. Depending on the cadre/status of employee the mobile
phones should be deposited at reception and at break time employees could go check for missed
calls of text messages received.
• Firm may also reckon about allowance for making personal calls from desk during working
hours as long as it does not become excessive and the work at hand is not jeopardized. For long
Managing Director of the KRK limited was very happy with the CEO and it was decided that from the
beginning of the next financial year the Balanced Scorecard will be implemented. For implementing, the
Balanced Scorecard, following strategic objectives were, decided to begin with
(i) Expansion of eco-friendly product line.
(ii) Improve ROI.
(iii) Customer retention
(iv) Reduction in time spent in non-value-added activities
(v) Improve on time delivery to customers
You are required to CLASSIFY the above strategic objectives by perspective and suggest a measure for each
objective
Answer:
Strategic Objective Perspective Measure
Expansion of eco-friendly product Learning and innovation No of eco-friendly products
line developed
Improve ROI Financial % increase in ROI
Customer retention Customer Number of repeat customers
Reduction in time spent on non-value Internal perspective % increase in MCE
added activities
Improve of on-time delivery to Customer (if highly rated by Number of on-time
customers customers) (or) deliveries
Internal Perspective
Part IV – Benchmarking
Recently, the company has decided to benchmark the performance of each plant individually by setting
the cost targets. For this a new CEO has been appointed. The newly appointed CEO suggested that to assess
the performance of each plant, a divisional transfer pricing policy is required to be implemented in each
plant. For this Managing director of the company is opined that the transfer price should be decided by
Negotiating or bargaining price between each divisional manager. CEO is not in agreement with the
opinion of the Managing Director.
However, in given case of XYZ Company, there exists no external market for Part A and Part B. Hence
Market based transfer pricing method and Negotiation Based transfer pricing method would not apply.
The management of AB Electronics Limited has pointed out that since last two years company's sales are
decreasing continuously. Customers are not showing interest in their products and company is going on
at par despite of good quality products and brand name, company is not able to create its products demand.
Company investigated its internal departments to see whether there is an issue of quality. They spend an
extra amount of 1% of its cost on testing the products for their quality check and also make a test check on
inward and outward materials. As a result of all these, company found that everything is as per its
standard.
To resolve this problem, company decided to decrease its selling price for various products so that demand
can be increased. In view of this company has decreased its selling price by 5% but decrease in selling price
does not affect much. As company has a good name in the market and well known in the market increase
in marketing and advertisement expenses is also not justified. Human resources of company are also
satisfied with company's policies for them. Company has a good relationship with the workers and also
pay a handsome remuneration to them. Internal working atmosphere of company is up to standard and
workers work as team members and there are no issues with unions and company employs skilled workers.
Management of company is not able to find out the problem as to why their sales are decreasing despite of
good quality and at best prices, so, they decided to appoint a team of experts to point out the problem. The
experts team investigate the internal procedures as well as make surveys of market and also take feedback
from customers, then they observe that now a days in modern era there are products with new artificial
intelligence which makes life easy. They are easy to use and more efficient and also energy savers and have
all features to attract customers and provide more value for money to customer. In modern urban life fully
automatic electronic devices which requires fewer human efforts & time and operates on artificial
intelligence are preferred. People are more interested in products which they can operate at remote
locations using wireless fidelity.
The company is doing well m internal processes and also working atmosphere is good and became a fame
since last two decades and also follows TQM to some extent but as you know "Change is the law of world"
but you have not updated your products with technology and pushing the company with outdated
technology without considering the long-term sustainability. Quality matter much but features also
matters. To resume your position back in the market you need to spend on R&D not on advertisement or
As management of AB Electronics Limited has to be spend a huge amount and efforts to get back its
position in the market, company wants to seek your opinion.