SCMPE Edition Four Additions Part Two

STRATEGIC COST MANAGEMENT CA.
DINESH JAIN
STRATEGIC COST
MANAGEMENT AND
PERFORMANCE EVALUATION
NEW ADDITIONS TO EDITION

4 PART TWO [JAN 2023]
BY CA.DINESH JAIN
BHARADWAJ INSTITUTE (CHENNAI) 1

STRATEGIC COST MANAGEMENT CA. DINESH JAIN
Details of this material:
The main-book on SCMPE (edition 4) covers all questions of study material, RTP (till Nov
2021), suggested answers (till July 2021) and MTP (till Nov 2021). I am releasing this material
to cover newly issued RTP/MTP/Suggested answers
Summary of additional material released:

Edition Month Coverage Additional Material
Edition 1 August 2019 RTP till May 2019 Nov 2019, May 2020 RTP
SA till Nov 2018 May 2019, Nov 2019 SA
MTP till May 2019 Nov 2019 MTP
Additional case studies
Additional case scenarios
Edition 2 March 2020 RTP till May 2020 Nov 2020 RTP
SA till May 2019 Nov 2019 SA
MTP till Nov 2019 May 2020, Nov 2020 MTP
New Study Material
Edition 3 Feb 2021 RTP till Nov 2020 Case study digest issued by ICAI
[Part One) SA till Nov 2019 May 2021 RTP
MTP till Nov 2020 May 2021 MTP
Nov 2020 SA
Edition 3 Feb 2021 RTP till May 2021 Nov 2021 RTP
[Part 2] SA till Nov 2020 Jan 2021 SA, July 2021 SA
Case study digest New case scenarios
Edition 4 Dec 2021 RTP till Nov 2021 May 2022 RTP
[Part One] SA till July 2021 Nov 2021 SA
MTP till Nov 2021 May 2022 MTP
Case study digest [CSD] New questions added in CSD
Edition 4 Dec 2021 RTP till May 2022 Nov 2022 RTP
[Part Two] SA till Nov 2021 May 2022 SA
Jan 2023 Student Journal
Link to download earlier additions:

Edition 1 https://bit.ly/new_questions_scmpe
Edition 2 https://bit.ly/scmpe_second_edition_additions
Edition 3 (Part One) https://bit.ly/case_study_digest_additions
Edition 3 (Part Two) https://bit.ly/scmpe_third_edition_part_two
Edition 4 (Part One) https://bit.ly/scmpe_addition_edition_4_part_one
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

TABLE OF CONTENTS
Chapter 2 – Modern Business Environment ....................................................... 4

Chapter 3 – Lean System and Innovation .......................................................... 12
Chapter 4 – Cost Management Techniques ...................................................... 22
Chapter 5 – Decision Making .............................................................................. 27
Chapter 7 – Performance measurement and evaluation ................................. 33
Chapter 8 – Divisional Transfer Pricing ............................................................ 34
Chapter 9 – Strategic Analysis of Operating Income ...................................... 36
Chapter 14 - Case Studies ..................................................................................... 39

Chapter 2 – Modern Business Environment
Part I – Total Quality Management
Part II – Business Excellence Models
Part III – Theory of Constraints
1. TOC and Cost of Quality:

Gupta Surgical Products Limited (GSPL) is a renowned company for the manufacturing of a wide range of
affordable surgical products. GSPL is promoted by Dr. Pooja Gupta who is a professor of medicine. GSPL
is only privilege surgical equipment company which has its chain of own exclusive stores, which are selling
products of GSPL, apart from a tieup with the medical and chemist shops across the nation for the sale of
their products. Although GSPL being an early mover of the industry was established around 25 years back
when hardly two or three players exist in the market, but the growth phase of the industry is still
continuing. Both the top and bottom line has an increasing trend, but the growth rate of the bottom line is
relatively less than the rate in case of the top line, the possible reason is increasing competition. This results
in the high cost of advertisement and marketing to keep market share intact. GSPL thinking to enhance the
capacity of its plant and other facilities, but availability of fund is a critical issue; since the contraction in
margin rate is witnessed for the last couple of years due to stiff competition, despite an increase in absolute
amount; GSPL is not ready to commit incremental financial charge on an account of enhanced financial
leverage, due to additional borrowing. Hence, GSPL fund their requirements internally.
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.

(iii) Viability of each option available with her based upon ideas from division heads and innovation team.
Consider each option an independent scenario from others and presume defect is identified at end of the
cutting and spun bonding process.
(iv) The cost of poor quality in both the possible cases.

Answer:
Report to assist management decisions of strategic importance regarding cost, pertaining to GSPL and FMD
(in light of dynamics of the business environment emerging due to outbreak of COVID-19)
Part (i) – Opportunities and related threats:

SWOT Analysis:
• Strengths and weaknesses are internally generated, whereas opportunities and threats are
emerging from the business environment external to the business boundary.
• Opportunities and threats are systemic in nature, usually uncontrollable, but can be responded.
The length of opportunities and threats depends upon an event (continuing or once-in-while) and
series of activities trailing to those events. The outbreak of COVID-19 is also one such event which
impact the GSPL significantly because of the nature of business.
Enhanced market demand without the extra cost of advertisement:

• GSPL is a growing company, but completion too. Amidst the stiff competition, GSPL can see out-
break of COVID-19 as an opportunity to sell more and more products. No doubt competitors will
try hard to capture the significant share of enhanced market, but GSPL has the advantage of cost
leadership which make their product affordable in the strategic segment in which they deal (KN-
95, if we talk about mask specifically).
• One can say enhanced demand is not permanent and it possesses severe threat, but see the option
2, 3, and 4 available, they all are such a nature where not capital cost involved. Machines are taken
on lease or task is outsourced (no doubt length of lease and outsource agreement need to be
decided carefully).
• Another the threat which can be a highlight that the Government themselves is promoting the use
of home-made mask too. KN-95 mask is approved by the regulator, ISO certified and
recommended by WHO, whereas such a home-made mask obviously not.
• Another threat, which can be considered that cheaper masks are also available despite that do not
fall in segment (KN-95) in which GSPL deals, still apart from the counter the argument stated in
the above point; GSPL can build their market by advertising the feature of ‘truly washable’ which
make KN-95 actually reusable, and it's clinically proved. The reusable nature makes it further
cheaper.
• It’s important here to note the cost leadership is also limited to relevant strategic segment not
necessary to the entire market.
Easy Availability of Credit:

• GSPL is already considering the enhancement of capacity but finding it difficult due to the adverse
effect of borrowing on financial leverage. Announcement from the ministry of finance, regarding
schemes of easy credit, credit without guarantee, interest subvention and moratorium,
exemption from statutory contribution, and deferment of duties and taxes for surgical
equipment manufacturer are opportunities and well in time because the problem of reducing
margin can also be addressed while enhancing the capacity without any adverse leverage effect. It
is important to consider the length and eligibility criteria of these benefits.
Part (ii): Core competencies as critical success factors:

The following are the core competencies which may help the GSPL to gain the cost leadership position (to
cut down cost where possible, because GSPL is charging Rs.90 which is on the lower side the rest of the
competitors price which ranges between Rs.100 to 105) to attain competitive advantage (enhanced market
share).
• Latest Technology: FMD is equipped with latest technology

• Knowledge: GSPL has wide knowledge of the industry and being the oldest manufacturer, it is
capable of being better than others
• Well established marketing network and wide reach
• Skilled workforce
• Clinically tested that is truly washable
Part (iii): Viability of options available:

• The available options can be classified into two categories, options 1 and 2 are related to process
re-engineering or automation; while options 3 and 4 are related to outsourcing. 1 and 3 are related
to cutting and spun bonding process, whereas 2 and 4 are related to stitching and finishing process.
• In order to access the viability of each such option the concept of the bottleneck (theory of
constraints) and throughput contribution is relevant. Currently, the monthly production and sale
are one lac units against the monthly capacity of 1,15,000 units (1,13,850 units after considering
defective units) in the cutting and spun bonding process and 1,00,000 units in the stitching and
finishing process. Hence the stitching and finishing process is bottleneck and operational at
maximum possible capacity.
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
Particulars Calculation Amount

Incremental revenues 13,850 x 90 12,46,500
Less: Raw material cost 13,850 x 40 -5,54,000
Less: Machine cost -6,00,000
Net Benefit 92,500
Note: Cost of defective units can also be adjusted in above working note
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.
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
Part (iv): Cost of Poor Quality:

• The cost of poor quality due to nonconformance to quality. This includes the cost of internal and
external failures. The defect which can’t be repaired and sold at a reduced price is known as scrap
and loss due to scrap covered under internal failure cost.
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)
If the defect is discovered at the end of stitching and finishing process:

• The 1,000 units of KN-95, which found defective at end of the stitching and finishing process, will
result in loss of revenue (throughput contribution and cost of material); because the stitching and
finishing process is a bottleneck activity, which currently operational at maximum capacity. Since
only 1,00,000 units on monthly basis can be processed in stitching and finishing process at
maximum, hence identification of defective (causing scrap, because non-repairable and non
capable of being sold at a reduced price) 1,000 units will result in only 99,000 units of KN-95
available for sale.
• Hence, the amount of loss will be Rs.90,000/- i.e. (1,000 units @ Rs.90 each (since cost of material
(40) and throughput contribution (50) already included in this 90 hence become irrelevant
individually)
Further details can be tabled on a requisition basis.

Closure of Report
Chief Management Accountant,
Gupta Surgical Products Limited
Part IV – Supply Chain Management
Part V – Gain Sharing Arrangement and Outsourcing
2. Gain sharing arrangement and outsourcing [Nov 2022 MTP]

The Board of Studies (BoS) at National Law Institute (NLI) has recently revamp the one of its certification
course on ‘law applicable to fin-tech transactions’ into ‘law applicable to transactions involving fin-tech
especially the application of Blockchain’. NLI is expecting increase in enrollment. It expect around 1000
candidates will enroll for course in each of upcoming batch, due to enhanced coverage of quality content
which is more relevant in current scenario. NLI has printing division which operates the printing press for
the printing of study material only. The estimate of cost of printing the study material for revised
certification course is Rs. 1,750/- per set*, but Rs. 2,000/- is added to the course fee as fee for self-learning
material. BoS always argue the cost of dispatching/posting the study material to candidates’ postal address
is always more than Rs. 250/- in the majority of cases, hence Rs. 2,000/- is subsidies price and such
difference is met with grants from government agencies. Since the study material is developed by external
resources persons and industry experts, hence royalty will be paid by NLI to such authors.
The break-up of cost and other relevant information are as follows:

• Direct Material Cost is Rs. 560/- (largely paper, supply of which is taxable at rate of 12%)
• Direct Labour Cost is Rs. 265/
• Variable Overheads are Rs. 725/- (including royalties fee of 200/-)
• Total Fixed Overheads (absorbed based on ABC) attributable to printing of 1,000 set of study
material of revised certification course is Rs. 2,00,000/-, out which 1,20,000 are committed in nature,
hence can’t be avoided.

Material costs are on CIF basis; since the books are exempt from GST hence credit is neither booked nor
claimed by the printing division of NLI.
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).
Statement of costs which can be avoided (relevant cost)

Cost Head Per-unit Cost (In Rs.) Total Cost (In Rs.)
Direct Material 560 5,60,000
Direct Labour 265 2,65,000
Variable overheads 525 5,25,000
[725 – 200]
Avoidable fixed Overheads 80,000
Total costs which can be avoided 14,30,000
Since the maximum amount of costs which can be saved on account of outsourcing of the printing of 1,000
sets of study material is Rs.14.30 lakhs, which is less than the price (Rs.14.50 lakhs) offered by ‘Janta Press’;
Hence NLI should not accept the outsourcing proposal

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
Reasons - why gain sharing arrangement fails

• Poorly drafting and structuring of clause/contracts. C

• Clue-less, careless and bungled implementation
• Lack of confidence
Check-points and measures

• Excellence at end of outsource contractor is prerequisite
• Innovation is shared responsibility
• Be specific
• Draft it in win-win structure
• Don’t shy to negotiate
• Define the length and mode of reimbursement
• Constitute an innovation taskforce

Chapter 3 – Lean System and Innovation
Part I – Just in Time
1. JIT Implementation [May 2022]

A Limited is manufacturing a part, which is used in computer. Presently the company follows traditional
system of the purchasing, quality check, storage and processing. CEO of the company has suggested that
by implementing Just in time inventory system for material purchases, the company will benefit a lot. As
per present policy of inventory, raw material required for 2 months production and finished goods
equivalent to the 2 weeks production are kept in stock. Other information are as under:
• The Average inventory of raw material is held by the company throughout the year. Purchase cost
of the raw material is Rs. 15 Crores for the year. Now on applying Just in time, the company
decided to take its production requirement directly from the suppliers. This will result into an
increase of the 10% in the cost of raw material purchased but will save the inventory holding cost
by Rs. 70 Lakhs. Raw material inventory insurance will not be required now, which is Rs. 1.40
Crores per annum. Savings in other overheads will be Rs. 20 Lakhs per annum.
• Projected production for the year is 2,00,000 Units. The company plans to maintain inventory of
finished goods as per present policy only. There is a possibility of production stoppages due to
unavailability of raw material from the suppliers. This could happen due to delay in delivery by
the suppliers. The labour works in one 8-hour shift per day and will remain idle if there is no
material to work on. Due to stoppage of production for this reason, it is possible to have stockout
of 4,000 units in a year. Stockout represents lost sales opportunity due to unavailability of finished
goods i.e. the customer walks away without purchasing any product. However, if overtime is done
by labour the stockout may reduced to 2,500 units. This overtime will cost Rs. 20 Lakhs.
• Currently, sale price is Rs. 6,000 per unit. Raw material procurement cost is Rs. 1,000 per unit, that
will increase by 10% under just in time inventory system. Other variable overheads are Rs. 3,250
per unit.
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
Decision on implementation of Just in Time:

• It is apparent that company is incurring slightly higher cost in JIT procurement system. Relevant
Cost in JIT procurement system is Rs.22,61,25,000 against Cost of Rs.22,30,00, 000 under traditional
costing system.

• Raw material procurement cost under JIT has been increased at a rate of 10% irrespective of
production volume which is the main contributor for cost under JIT system along with stockout
cost.
• It is important to note that, by switching over to JIT system, company can save working capital
requirement of Rs.3.33... crore (Rs.20 crore×2/12) on account of average inventory of raw material
held at present. However, a return above equal to 9.375% and above would be needed on long term
investment to justify the JIT procurement policy. Since a return on 9.375% on Rs.3.33… crore will
save Rs.31,25,000 which is the indifference point to make the decision.
• In addition to the financial factors discussed, it has to consider non- financial factors as well before
taking any final call on JIT for instance reliability of supplier, quality at process, workforces’
capability of performing variety of operations, existence of EDI system etc.
Note 1: Stock-out cost analysis:

Total stock-out units 4,000
Contribution per unit under JIT 6,000 – 1,100 – 3,250 1,650
Avoidable stock-out units:
Overtime cost 20,00,000
Stock-out cost 1,500 units x 650 24,75,000
Stock-out cost for 1,500 units 20,00,000
(Do overtime and incur 20 lacs)
Un-avoidable stock-out units:
No of units of stock-out 2,500
Stock-out cost 2,500 units x 1,650 41,25,000
• Company should do over-time and avoid stock-out of 1,500 units. This would lead to cost of
Rs.20,00,000
Factors to be considered for implementation of Just-in-Time System:

The management should therefore carefully consider the following points:
• The entire production process has to be detailed and integrated sequentially. This is essential to
know because it should be known in advance when in the subassembly process each raw
material is required and in what quantity.
• Since production is dependent on delivery and quality of raw material, heavy reliance is being
placed on suppliers. They should be able to guarantee timely delivery of raw material of the
appropriate quality. The company is paying a premium of 10% of original cost, that is Rs. 100 per
unit in order to ensure the same. Each unit gives a contribution of Rs. 1,650 per unit, which is 27.5%
of the sale price per unit. Lost sales opportunities due to unavailability of raw material or non-
conformance of the material can result in substantial losses to the company. While, portion of this
has been factored while doing the cost benefit analysis of implementing Just-in-time systems, it
needs careful consideration and monitoring even after implementation. Therefore, to hedge its loss,
the management and suppliers should agree on penalties or costs the supplier should incur should
there be any delay or non-conformance in quality of materials beyond certain thresholds.
• Accurate prediction of sales trends is important to determine the production schedule and
finished goods planning.
• Continuous monitoring of the system even after implementation is essential to ensure smooth
operations. Management commitment and leadership support is essential for its successful
implementation and working
Part II – Kaizen Costing
2. Kaizen Costing and 5S:

At Sanjivini Hospital, stores recently complete the exercise of numbering the patient files to keep the record
in to shorten retrieve, because the reception desk finds it cumbersome to locate the file in case of revisiting
patients. The different departments (OPD, IPD, and OT) of Sanjivini Hospital uses some of the surgical

items, out of common inventory pool; hence visual control is used to prevent stock-out situation or improve
inventory control.
“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.

vi. LIST at-least three practices that can help Sanjivini Hospitals to foster the Kaizen culture.
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
Part (ii): Assessment of performance:

• Performance of period just ended (t0) from the perspective of Kaizen Costing is appreciable
because during the years the Kaizen Cost reduction target was Rs.1,500, means through Kaizen
initiatives it has to reduce the cost from Rs.18,750 per bed per day to Rs.17,250 per bed per day;
whereas Sanjivini Hospital attains the actual average operating cost of Rs.17,200 per bed per day,
means a reduction of Rs.1,550 (i.e., more than Kaizen Cost reduction target was Rs.1,500).
• In other words, one can say rather than reducing the cost by 8% Kaizen initiatives helps to
reduce case by 8.27%; hence performance is acceptable and appreciable.
Note: Standard cost is irrelevant from the point of view of kaizen costing
Part (iii): Kaizen and 5S:

At Sanjivini Hospital, the following Kaizen initiatives can be linked with 5S–
• Colour coding of the waste bin to prevent mix-up of medical wastes.
• To save energy, switches were labelled.
• Visual control to prevent inventory control.
• Proper numbering of the patient files to shorten retrieve time.
Note: Kaizen initiative taken place at Sanjivini largely covered by second ‘S’ Seiton i.e., set in order.
Part (iv): Tracking of Kaizen Suggestions:

Tracking of Kaizen suggestions can easily be practiced at Sanjivini Hospital by maintaining a Kaizen
suggestion board that generally comprises–
Kaizen Suggestions To Do Doing Done
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
Part (v): Relationship between Kaizen Process and PDCA Cycle:

Kaizen is solving problems process at working place, to improve situation and condition, whereas PDCA
(also known as Deming Cycle) is an iterative four-step management method used in business for the
control and continuous improvement of processes and products. PDCA stands for the plan–do–check– act.
The PDCA Cycle provides a framework and structure for identifying improvement opportunities. The
seven steps of the Kaizen process are:

Step 1: Selection Step 5: Step 6: Check Step 7:
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 (vi): Practices to foster Kaizen Culture:

• Promote the culture of sharing of ideas: Best practices can be evolved within the hospital through
sharing and discussing the idea (change) that can solve the problem causing a gap in existing and
ideal position. Such practices shall be adopted in every vertical of the hospital.
• Do whatever best can be done with existing resources: Reach to the level of optimum utilization
and remember there always scope for improvement.
• Foster esprit-de-corps culture: A culture in which no blaming other’s opinions, instead of this they
support in implementation after the agreement from the supervisor or work improvement team.
• Integrate everyone's image: To have overall perspective while evaluating any individual initiative
(suggested change)
Part III – 5S
3. 5S and Balanced Scorecard:

Mijaj is the leading household name in the nation for electronics and automobiles. Mijaj inaugurated its
two-wheeler plant at Santnagar with a planned capacity of one million motorcycles per annum, more than
a decade ago. The plant was originally built on a 65-acre area with another 155 acres allocated for a vendor
cluster. The production unit spread out in 40,000 square meters and is operated by 600 line engineers.
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
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.

• The incidences that took place were largely due to items at the workplace are either not properly
sorted or not in order. Lack of maintenance of the machines in term of cleaning and repair also
another major reason for same.
• Total of 37 incidences took place due to poor workplace management at the Santnagar plant of
Mijaj, which represent more than 2/3 incidence of the last two years.
Description Reason Can be overcome

13 incidences (1 Cluttered production floor Seiri (sorting)
were serious, Use red and yellow tags with
involving one store and designated holding
casualty) area
19 incidences (2 Using either wrong tool (tool required either Seiton (set in order) Use of label,
were serious, but misplaced or non-accessible due to any reason) signs, colour code, line marking,
no causality) or hazardous/toxic elements were not handled tool form, or shadowing
properly including failure to keep the process
within the control limits
5 incidences (4 Breakdown or failure of machines, because they Seiso (Shine)
were serious, were not regularly cleaned and repaired (even The operator shall assume the
involving two the repair request/ complaints remain role of cleaner. Cleaning shall
casualties) unresolved) involve inspection of all aspects
of the machine – front, rear, left-
right, top and bottom
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.

• In case senior executives delegate the responsibility of the implementation to middle-level
managers.
• If companies, try to copy measures and strategies used by the best companies rather than
developing their own measures suited for the environment under which they function.
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
Part V – Six Sigma
Part VI – BPR Versus PI

4. BPR
Sim-tech Electronics Limited (SEL) deals in a wide range of electronic products for domestic and
commercial use. SEL was established around 40 years back and famous for completely indigenous
products. Raw materials including assembly components are procured from registered vendors only.
Delayed processing of invoices by SEL is the major concern of vendors. Even a few vendors deny the further
supply of material.
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

(i) CEO stressed the ‘breaking away from the old rules’ and mentioned ‘don’t automate, do obliterate’.
Synthesis of both the statements in the context of BPR. Also ADVISE how account payable function
(process) can be re-engineered at SEL.
(ii) Improvement, Redesign, and Re-engineering are not the same. Briefly COMPARE the terms to help the
functional heads, who unable to understand the CEO’s remark.
(iii) LIST, set of criteria that can be applied to identify the processes suitable for re-engineering.
(iv) LIST the plausible conflicts which SEL may face along with possible the way-out.
(v) CEO said ‘why only accounts payable why not others or all’. STATE the steps involved in Business
Process Reengineering Life Cycle?
Answer:
Part (i):
• Business Process Re-engineering (BPR) is a fundamental rethinking and radical redesign of
business process to achieve dramatic improvement in critical contemporary measures of
performance, such as cost, quality, service, cycle time, etc.
• Michael Hammer looks at processes as a whole not just as a collection of parts; because only then
you can decide on the best way to do the whole process and redesign it radically.
• Hammer wrote an article titled ‘Re-engineering work: Don’t automate, obliterate’, wherein he
said don’t use IT just to make existing processes faster; be prepared to design a completely new
process. Basically, Hammer favours breaking away from the old rules.
• Hence in both the statement CEO advocates for BPR.
Re-engineering of accounts payable at SEL:

• Currently, the accounts payable department receives 3 documents in physical hard copy and then
matches the same to proceed for payment to the vendor.
• Out of these three documents (duplicate hard copy of purchase order, a duplicate of good receipt
note, and invoice) accounts payable department can skip invoice and it can proceed for payment
based upon auto-matching of good receipt note with purchase order.
• Further, a real-time ERP solution (maybe cloud-based or SEL’s server-based) can put into place to
automate the process of matching the purchase order and goods receipt note (because both the
document either created or hosted on the ERP). This also results in saving time, earlier spent in
punching the data (at end of account payable department), and physical movement of
documents from one department from others.
• Maintaining records and generating reports become easy and cheap, Such ERP will also auto-check
the invoice details whenever punched into the system.
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 (iii): Criteria to identify the processes

The processes for re-engineering shall be selected with the utmost care by a cross-functional team of
managers considering the vision and business goals from a holistic view. SEL shall consider the following
points to identify the processes:
• That can be broken into the parts.
• Those which are behaving like constraints (Bottleneck).
• Feasible to make the change.

• Cross-functional and cross-organisational.
• Core processes that have high impact – the business process which capable to add value
substantially. One can use a value chain to identify high-level processes.
• Front-line customer serving - Business processes that are customer-facing used by front-end
employees
Part (iv): Challenges in employing BPR:

• Decreased Employee Morale: Changes in role and responsibility are expected after BPR, with
which employees may not be comfortable and may lose job satisfaction. The staff of the accounts
payable department of SEL may be transferred to some other department.
• Reduced staff: Automation leads to reduction of the workforce, hence job security is a cause of
worry. In the accounts payable department of SEL too, many may lose the job
• Incomplete impact analysis: Processes may be complex, hence BPR may result in either indirect
effect or effect on an invisible element that can’t be predicted with the acute degree.
• All or nothing methodology: BPR is all about radical change and looks at processes as a whole not
just as a collection of parts, hence either complete change or nothing to change
Overcoming BPR Challenges:

• Focus on all change management impacts – People, Process, and Systems.
• Communicate early and often.
• Practice continues improvement.
Part (v): BPR Life Cycle:

Business process re-engineering life cycle involves seven steps out of which first two are enterprise-wide
and the remaining five are process specific.
Enterprise-wide • Visioning - Define corporate vision and business goals
engineering • Identifying - Identify business processes to be reengineered
Process specific • Analysing - Analyse and measure an existing process
engineering • Redesigning - Identify enabling IT & generate alternate process
redesign
• Evaluating - Evaluate and select a process redesign
• Implementing - Implement the reengineered process
• Improving - Continuous improvement of the process
Part VII – Cellular Manufacturing

Chapter 4 – Cost Management Techniques
Part I – Cost Control and Cost Reduction
Part II – Target Costing
1. Target Costing [May 2022]

(i) Implementation of the Target Costing technique requires intensive market research. Give your
COMMENTS.
(ii) STATE the impact of Target Costing on profitability
Answer:
Part (i):
• Target cost is the difference between estimated selling price of a proposed product with specified
functionality and quality and the target margin. This is a cost management technique that aims
to produce and sell products that will ensure the target margin.
• It is an integral part of the product design. While designing the product, the company needs to
understand what value target customers will assign to different attributes and different aspects
of quality. This requires use of techniques like value engineering and value analysis.
• Intensive marketing research is required to understand customer preferences and the value they
assign to each attribute and quality parameter. This insight is required to be developed much
before the product is introduced. The company plays within the space between the maximum
attributes and quality that the company can offer and the minimum acceptable to target customers.
Therefore, in absence of intensive marketing research, the target costing technique cannot be
used effectively
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
2. Target costing – Cost reduction and environmental impact:

PX-2 manufactures cartons primarily for the use of manufacturers of electronic products. Cartons are
customized for each brand that individual manufacturers produce. Cartons for each brand are unique,
having specific scheme of instructions, bar code, information, and pictures. Presently, PX-2 produces at
least 35 different types of cartons for each brand and has a market share of 40% in this segment. The market
for electronic products is expected to grow exponentially in India. This has attracted not just more
electronic products manufacturers but also suppliers of similar cartons to cater to the demand from such
manufacturers. Therefore, an electronic product manufacturer can procure customized cartons for its
product/(s) from multiple carton manufacturers. PX-2 has been in this business for many decades. It is a
family run business.
Production Process:

Kraft paper is the primary raw material required to make corrugated cartons. PX-2 buys this from external
suppliers. The Kraft paper is loaded into machines called corrugators. Corrugator machines processes this
into cardboard sheets. These sheets are then printed upon with unique colour along with information
relevant to the electronic product for which it is being made and cut into appropriate size. Batches of
finished cartons are packed together and shipped to the warehouse. In the recent years, awareness about
corporate social responsibility has led manufacturers of cartons to use recycled paper as raw material to
make cartons. Recyclable paper material is procured from scrap paper dealers. Raw material needed for
production is stored within the factory premises.
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.

Required:
As a newly employed management accountant you have been requested to suggest possible solutions to
improve profitability. Following questions will help you address the problem:
(i) CALCULATE the current cost of operations to produce 1 ton of cartons. Given the current sale price of
Rs.1,40,000 per ton, what is the profit or loss being incurred?
(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:
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.
WN 2: Computation of Target Manufacturing Cost:

Target Selling Price 1,10,000
Less: Target Profit -5,000
Target cost per Ton 1,05,000
Less: Shipping cost -6,000
Less: Warehouse maintenance expenses -30,000
Target Manufacturing cost per Ton 69,000
WN 3: Computation of ideal manufacturing cost:

• Ideal manufacturing cost of production per ton of corrugated cardboard sheet. Ideal
manufacturing cost would be the cost incurred when the resources are used in the most efficient
manner. In the given problem, the input-output yield of 50% is the only sub-optimized resource.
Hence, the ideal cost of production, without wastage of resources would be when the input-output
yield is 100%.
• When Yield is 100%, only one ton of raw material is needed to produce one ton of corrugated
cardboard sheets.
Raw Material cost (50,000 x 0.80) + (20,000 x 0.20) 44,000
5
Other costs 20,000
Manufacturing cost per Ton 75,000
Conclusions from target manufacturing cost and ideal manufacturing cost:

• Target manufacturing cost is Rs.69,000 per ton while ideal manufacturing cost is Rs.75,000 per ton
of output. Hence, it can be concluded that even with the most efficient use of resources, the
target manufacturing cost cannot be achieved.
• As mentioned in the problem, the “competitor-study” indicates that the competitor selling at
Rs.1,10,000 per ton is able to earn a reasonable return even at such lower price.
• Therefore, it can be concluded that the presumption that production is based on “best-practices”
is wrong. Unlike the opinion of the production team, the cost being incurred is not reasonable.
• Competitors have a more cost-efficient production process that is yielding them profits even at
lower sale prices. Therefore, production personnel have to undertake study of more recent
advancements in the production process that the new entrants are able to implement. Such a study
would include value analysis and value engineering practices.
• Study of the input-output yield, which is currently at 50% may result in same savings through
streamlining production activities. Similarly, the production can revisit the product mix. If cheaper
recyclable paper can be used to in more quantity to produce the same quality of cardboard sheets,
significant savings in cost can be achieved. Efforts can also be taken by the senior management to
identify areas that can have a favourable impact on cost. For example, upgrading facilities in the
production line or storage areas could lead to cost savings.
WN 4: Computation of revised cost:

Raw Material cost [(51,000 x 0.55) + (15,000 x 0.40)] 40,941
0.85
5
Other costs 20,000
Manufacturing cost per Ton 71,941
Shipping cost 4,000
Warehouse maintenance expenses 25,000
Total cost per Ton 1,00,941
Add: Required margin 5,000
Sales price per Ton 1,05,941
Conclusion: If PX-2 is able to implement these parameters, it can easily turnaround and become profitable.
The output can be priced at Rs.1,05,941 per ton in order to get a profit of Rs.5,000 per ton. This is lower than
it nearest competitors offering of Rs.1,10,000 per ton. Hence not only can PX-2 become profitable, it can also
regain, if not expand its market share.
How has implementation of recommendations from the target costing study made PX-2 more
environmentally responsible?

• Improving the product input – output yield from 50% to 85% has reduced wastage of raw material.
The quantum of Kraft paper/recyclable paper needed for production has reduced from 2 tons to
1.1764 tons. Since paper is a product made from trees, it contributes towards reduction of cutting
down trees / deforestation.
• Changing the product mix to include more paper that is recyclable contributes towards better
utilization of scrap. Otherwise, such scarp discarded in landfills becomes unusable. Landfills
require huge land resources, since waste has to be buried. Hence, better utility of recyclable
products protects the environment, places lesser pressure on landfill resources and at the same
time reduces cost of operations for the company. By changing the product mix, PX-2 has
substantially reduced raw material cost from Rs.88,000 to Rs.40,941 per ton, a 50% saving!
• Use of efficient transportation facilities reduces fuel emissions. This reduces the pressure for fuel
that is derived from natural resources.
• Optimization of storage space conserves energy required to operate the warehouse. Again, this
reduces pressure on resources like land and electricity
Part III – Life Cycle Costing
Part IV – Pareto Analysis
Part V – Environmental Management Accounting
3. Environmental Management Accounting [May 2022]

CATEGORIES the undermentioned costs under following dimensions
• Environmental Prevention Costs
• Environmental Appraisal Costs
• Environmental Internal Failure Costs
• Environmental External Failure Costs
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

Chapter 5 – Decision Making
Part I – Basics of Marginal Costing
Part II – Activity based CVP Analysis
Part III – CVP Analysis in service and non-profit organisations
1. BEP of Hospital [May 2022]

SMS Hospital operates a 60-bed capacity Healthcare Unit and charges Rs. 4,250 per bed per day from the
patients. Following data have been provided for the year ended March 2022.
Fees Collected during the year 5,10,00,000
Variable cost 2,10,00,000
Fixed cost 1,80,00,000
The requirement of nursing staff is in the ratio of 500:1 mean for every 500-patient bed day 1 nurse requires.
The remuneration of the nurse is Rs. 2,40,000 per annum.
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
WN 2: Computation of Break-even Point:
Let us assume X to be number of patient days

At Break-even point, total sales would be equal to total cost
Total sales = 4,250X
Total cost = Variable cost + Nurses + Other fixed cost

X
Total cost = 1,925X+ ( ) 2,40,000 + 1,90,40,000
500
Total sales = Total cost
X
4,250X= 1,925X+ ( ) 2,40,000+ 1,90,40,000
500
2,325X = 480X + 1,90,40,000; 1,845X=1,90,40,000; X = 10,320 patient days
Note: The BEP computed above is tentative BEP as the equation considers cost of nurses as variable in
nature. This is because nurses cost is taken as 480X. However, the nurses cost would be semi-variable in
nature and it would depend on the number of lots
Computation of final BEP:

❖ 10,320 units falls in 21th lot of 500 units and hence final BEP can lie in 21st lot and 22nd lot (same lot
and one lot above)
Particulars 21st lot 22nd lot
Revenues 4,250X 4,250X
Less: Variable cost 1,925X 1,925X
Less: Nurses cost 50,40,000 52,80,000
(21 x 2,40,000) (22 x 2,40,000)
Less: Fixed cost 1,90,40,000 1,90,40,000
Profit 2,325X – 2,40,80,000 = 0 2,325X – 2,43,20,000 = 0
Number of patient days (X) 10,357 patient days 10,460 patient days
• Final answer is 10,357 patient days as the same falls in 21 st lot of 10,001 to 10,500
• 10,460 patient days is not a valid answer as the same does not fall in 22 nd lot
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
Part IV – Relevant Costing
Part V – Indifference Point and Shut-down Point
Part VI – Limiting Factor
Part VII – Make or Buy Decisions
Part VIII – Special Orders
Part IX – Evaluation of multiple alternatives
Part X– Further Processing Decisions
Part XI – Dropping a product line
Part XII – Ethics and non-financial considerations in decision making
2. Ethical issues [Nov 2022 RTP]

Capson Industries is an electronic company producing office equipment known for the printers which are
cost-effective and durable. In order to maintain and improve competitiveness, Capson focuses on strategic
cost reduction through continuous improvement. You are a management accountant and practising
independently as a freelance consultant. You are hired as a consultant by the management of Capson and
currently evaluating whether to outsource the production of a drum (item code D32) used in its best-selling
laser printer or should continue to manufacture in-house in the upcoming year. The outsource vendor
quoted the bid price of Rs.225 per unit of D32 for the upcoming year.
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.
Product Summary Cost Summary (Figures in Lacs)

Product – Laser Drum Direct material Consumed – 33.975
Product ID – D32 Direct labour paid – 16.47
HS Code – 84439100 Production overhead (other than leases) – 23.72
Build – In house manufacturing Lease rental of space, plant & equipment – 15.60
Production during year – 36,000 Units Administration overhead (other than leases) – 6.23
You also gather the information relevant to D32, which signify during the upcoming year–
• Direct material prices and direct labour rate expected to increase by 6% and 5% respectively.
• Leases can be terminated, but the cost of termination will be equivalent to a half-amonth rental.
Lease rentals are static over the years for the next three years. Space and plant have sufficient idle
capacity to absorb the increase in production.
• 60% and 30% of the production overhead and administration overhead are variable in nature
respectively. Rest is fixed and unavoidable. Total variable costs are directly and linearly
proportionated to the volume of production. Variable overhead costs expected to increase by 3%
due to the inflation effect.
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:
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

Production OH 23,72,000 x 60% 16,28,773
[ + 3%] x 40,000
(Variable) 36,000
Production OH Committed and hence irrelevant -
(Fixed)
Admin OH 6,23,000 x 30% 2,13,897
[ + 3%] x 40,000
(Variable) 36,000
Admin OH Committed and hence irrelevant -
(Fixed)
Lease rental Avoidable cost 15,60,000
Total Cost of Make 93,25,670
WN 2: Computation of relevant cost of buying the product:

Cost of Purchase 40,000 x 225 90,00,000
Cost of terminating lease agreements 0.5 65,000
15,60,000 x ( )
12
Total Cost of Purchase 90,65,000
Since the calculations show there is a saving of Rs.2,60,670 (93,25,670 – 90,65,000) if production of D32 is
outsourced, rather than producing in-house; hence considering monetary information it is worthwhile to
outsource the production of D32.
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)
• Impact inside Capson in terms of:

o Possible lay-offs: Lay-off has legal implications as well as an enhanced financial burden
in form of compensation cost (against the loss of employment)
o Employee morale: Lay-off or shift of idle staff from one department to another will result
in low employee morale, which will result in low productivity (but if employee/workers
union are strong then may lead to strike etc.)
o Control over value chain: D32 may or may not be key component according to the
engineering department, but Capson need to see from customers perspective if it is
component which enhances the overall value of printer which customer look at then need
to be produced in-house (capability shall be enhanced for better quality). If a non-value-
added component, then can be outsourced to spare the time in order to focus on strategic
aspects.
• Apart from these factors, the commercial aspects such as confidentiality, technical know-how,
termination of lease as well as relations with lessor and change in market forces (suppliers’
bargain power) shall also be considered
Part (ii):
Response to the dilemma

• Since it is an ethical dilemma, hence the resolution can be best guided by fundamental ethical
principles for accounts professionals. Principle of integrity, objectivity, due diligence, and
professional behaviour applies here.
• Following the principle of Integrity, management shall be informed and advised fairly, further
considering the objectivity, the biased advice, indications and descriptions of VP-production shall
be ignored completely. The recommendation to management shall be based purely on facts and
fair estimates which are collected and analysed with due diligence.
• Maintaining professional behaviour and independence, fair recommendations shall be
submitted to management at Capson ignoring the personal dejection and verbal inducements
of VP-production. Recommendation to management may include the plausible impact and effects
of the decision.
3. Non-financial considerations [May 2022]

A Consultancy firm having its branches across India is facing the problem of non-timely completion of
services. Client are not satisfied with their services just because of delay. However, firm has a qualified
team of professionals in different fields and the team members are highly qualified and experts in their
field.
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

term sustainability, it’s better to accept cell phones as a part of modern-day work life and establish
policies for their use. As long as firm enforce its “cell phone use at work” policy, firm should see
usage settle at levels that are reasonable for its business.

Chapter 7 – Performance measurement and evaluation
Part I – Financial Measures of Performance
Part II – Non-financial Measures of Performance
Part III – Balanced Scorecard
1. Objectives and performance measures [May 2022]

KRK Limited deals in spare parts of motorbike. Since last 2 years, it has shown loss even though it has
negotiated with the suppliers very well and was able to purchase the goods at very competitive rates. The
newly appointed CEO believed that there is a need of Implementation of Balanced Scorecard. CEO met the
Managing Director and stated that "The Balanced Scorecard is a collection of critical performance measures
that have some special properties. The performance measures are derived from a company's vision,
strategy and objectives. Performance measures should be chosen so that they are balanced between
outcome and lead measures."
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
Part V – Performance Measurement in the not for profit sector

Chapter 8 – Divisional Transfer Pricing
1. Transfer pricing methods [May 2022]

XYZ Company is a manufacturer of an instrument which have monopoly in the market. The company is
manufacturing this instrument since 2000. Two parts, part 'A' and part 'B' are required to manufacture this
instrument. Part 'A' is manufactured at plant situated in Gujarat. Part B is manufactured at plant situated
in Rajasthan. The instrument is being made by assembling the parts in assembling plant situated in
'Gurgaon'. The Part 'A' and Part 'B' cannot be sold individually in the market
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.
You have been appointed to ANALYZE and give ADVICE:

• Whether opinion of the Managing Director is correct. Give reasons.
• Options available for deciding the method of transfer pricing.
While giving your advice discuss the advantages, disadvantages and behavioral consequences of each
method.
Answer:
Part (i):
• A negotiation-based transfer price is arrived by giving managers of the divisions authority to
decide on a mutually agreeable transfer price. This is based on external information like the
market price of the component, the terms of sale within the industry as well as the company’s
internal cost of production of the component.
• The managers can independently decide whether to buy (or sell) from its internal unit or to source
from the external market. Here, Parts A and Parts B cannot be sold individually in the market, there
exists no external market for them. Hence there is no comparative external price, information about
terms of trade etc. to compare them with.
• Therefore, negotiation-based transfer price is not possible in the case of XYZ Company.
Therefore, the Managing Director is wrong.
Part (ii):
Transfer Pricing Methods can be broadly divided into three categories–
• Market Based Transfer Price
• Cost Based Transfer Price and
• Negotiation Based Transfer Price
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.
Cost-based transfer price:

❖ Cost based pricing models are based on internal cost records of the company. This method can be
used when the information on market price is unavailable or if the management wants to
benchmark division’s performance based on cost targets
❖ Cost based transfer price may consider variable cost, standard cost, full cost and full cost plus
mark-up
❖ Advantages:
o Performance can be benchmarked against internal cost targets
o Information is more readily available as compared to market price
❖ Disadvantages:
o Cost basis on which transfer price is to be fixed can be subjective

o Since cost is passed on to the next division, there will be little incentive for the supplying
division to reduce costs
Method Basis Advantages Disadvantages Behavioral consequences

Marginal TP is calculated Useful when No fixed cost or mark- Non recovery of fixed cost
cost based based on supplying up is allowed and can demotivate the
transfer margin cost division has hence supplying supplying divisions. They
price (additional spare capacity division will not any may oppose certain
cost) incentive to do decisions like further
transfer capacity expansion or
further infusion of
investment that lead to
higher fixed cost.
Standard TP is recorded Performance Profit performance Budgeted costs are based
cost based based on pre- evaluation can be measurement is on historical cost records.
transfer determined done against centralized and hence Therefore, there is little
price cost budgeted cost cannot be measured incentive to make costs
targets for individual more cost efficient. The
divisions company should ensure
that standard cost based
transfer price is
periodically adjusted for
any major revision in costs
or assumptions.
Full cost TP is based on Full cost of goods No mark-up is Distorts cost structure
based full cost of is transferred and charged and hence while making decisions.
transfer goods which hence supplying supplying division Purchasing department
price will also division will not will not have any views the cost as a variable
include fixed show loss incentive to do one whereas in reality it
costs transfer as the transfer includes a portion of fixed
will not add to profit cost of supplying division
Cost plus TP is based on Supplying Under this method TP If performance evaluation
a mark-up full cost plus division makes may be nearer to the is based on cost targets, it
based mark-up. profit and hence market price. must account for
transfer Mark-up can be this addresses the However there are inflationary and
price a percent of disincentive cost savings on deflationary situations.
cost or capital problem of internal transfer and
Specially in inflationary
employed supplying the same should be
situations, the managers
division factored in while
may not be able to control
fixing TP
the costs. Hence the cost
target may be leading to
demotivation.

Chapter 9 – Strategic Analysis of Operating Income
Part I – Growth Productivity and Price Recovery Variances
Part II – Activity Based Costing
Part III – Direct Product Profitability / Customer Profitability Analysis
1. Customer Profitability Analysis [May 2022]

SR Limited deals in readymade garments and its clients majorly include medium and large outlets. There
are regular complaints from clients regarding delivery issues. As SR Limited understand the critical
behaviour of clients and want to establish "Customer Profitability Analysis" (CPA) so that critical customers
who are key factors can be recognized. SR Limited provide following information regarding its four major
customers:
Particulars A B C D
No of units sold 36,000 48,000 42,000 55,000
Contribution per unit 36 45 48 45
No of purchase orders 100 200 150 100
No of deliveries (normal) 3 4 4 5
Kilometres per delivery 100 50 250 350
• Order processing cost = Rs.12,000 per order
• Product Handling Cost = Rs.0.90 per unit
• Transport Cost = Rs.18 per Kilometre
Required:
(a) EVALUATE the Customer Profitability by calculating Total Profit as well as Profit Per Unit from each
customer for SR Limited and INTERPRET each customer.
(b) DEMONSTRATE three fundamental aspects of CRM to facilitate building relationship with profitable
customer.
(c) ENUMERATE two benefits of Customer Profitability Analysis (CPA).
(d) DISCUSS the relevance of Customer Profitability Analysis in reference to Banking and Hotel sector.
Answer:
Statement showing profitability of the customer:
Particulars A B C D
Margin (No of units sold x margin per unit) 12,96,000 21,60,0000 20,16,000 25,20,000
Customer attributable costs:
Cost of processing purchase order 12,00,000 24,00,000 18,00,000 12,00,000
(no of orders x cost of processing the order)
Product handling cost 32,400 43,200 37,800 50,400
(no of units sold x cost of handling per item)
Delivery cost 5,400 3,600 18,000 31,500
(no of deliveries x km per delivery x cost per km)
Total customer attributable cost 12,37,800 24,46,800 18,55,800 12,81,900
Profit (or) loss 58,200 -2,86,800 1,60,200 12,38,100
Profit margin (%) 1.62 -5.98 3.81 22.11
Analysis
• “Customer D” is the most profitable customer both in terms of absolute total profit (Rs. 12,38,100)
as well as profit per unit Rs. 22.11 per unit. The 56,000 units sales volume generated for customer
D accounts for (30.8%) of the total sales volume. With a contribution margin of Rs.45 per unit
amounting to a total of Rs. 25,20,000, the customer generates higher contribution in total as
compared to others. Despite having highest sales volume, the number of purchase orders placed
by this client is the lowest at 100 orders for the period. Hence order processing cost is at lowest
level, contributing to the overall profitability generated from sales with this customer. The
Kilometers covered per delivery is the highest for this customer at 350 Kms per delivery with 5
deliveries for the period. Among the customers, Customer D has the highest delivery cost. In view

of rising fuel prices, if SR Ltd. would like to trim the costs, it could negotiate lesser deliveries
for the period. However, Customer D is a very important and profitable customer for SR Ltd.
and hence negotiations must ensure that Customer D is completely satisfied with any revision
the product delivery schedule of SR Ltd.
• The second most profitable customer for SR Ltd. is “Customer C”. The 42,000 units sales volume
generated for customer C accounts for (23.08%) of the total sales volume. With a contribution
margin of Rs.48 per unit total contribution generated from these sales amounts to Rs. 20,16,000.
This customer generates higher contribution rate of Rs. 48 per unit of sales as compared to bigger
customers like Customer D and Customer B. This may be due to better negotiation for selling
price with the customer by SR Ltd. as compared to other customers. SR Ltd. can look into this
synergy and try to apply it to other customers as well where feasible. Customer C places 50%
more orders as compared to the largest customer, Customer D. Hence, to improve profitability by
trimming costs, the SR Ltd. can negotiate for Customer C to place bulk orders that would reduce
the number of orders for the period. Similarly, the number of kilometers per delivery is higher as
compared to Customer A and B. Hence in view of rising fuel prices, SR Ltd. may negotiate for
lesser deliveries for this customer.
• The third most profitable customer for SR Ltd. is “Customer A”. As compared to others, this
customer generates the lowest sales volume at 36,000 units for the period. The contribution per
unit at Rs.36 per unit is also the lowest among the customers being analyzed. SR Ltd. can review
the reasons for this low contribution margin. This could either be due to disadvantageous sale
price negotiations with the customer (maybe giving higher than normal discounts to Customer
A). Profitability from sales to this customer can be substantially improved by acting upon the
problem lower contribution margin
• “Customer B” is a loss-making customer for SR Ltd. Despite having a second highest sales
volume of 48,000 units for the period (26.4% of the total sales volume) and a relatively high
contribution margin of Rs. 45 per unit, this customer generates a loss of Rs.2,86,800 for the period,
that is a loss of Rs. 5.98 per unit. The primary reason for the loss is the high number of purchase
orders placed by Customer B. Customer B places 200 orders for the period which is double of the
orders placed by the largest client Customer D. SR Ltd. could negotiate bulk orders to be placed,
which can reduce the order processing cost substantially. If this is not feasible, SR Ltd. can then
charge extra for the frequent orders placed by Customer B. This could significantly improve the
profitability of sale generated with this client.
• Product handling cost of Rs.0.9 per unit is a non-value adding expenditure. SR Ltd. should try
to minimize this cost as much as possible in order to improve profitability
Fundamental aspects of CRM:

Supply chain management is the technique to integrate the supplier, manufacturing, store, and distribution
function efficiently; in order to procure, produce and distribute at/in right time, quantity and place
respectively. For effective distribution, CRM can be enabling tool. CRM is an integrated approach to
manage and coordinate customer interactions to identifying, acquiring, and retaining customers. CRM
enables businesses to understand and retain customers (through better customer experience) apart from
attracting new customer, in order to increase profitably and decrease customer management costs. CRM
system, comprises following three fundamental aspects to facilitate building relationship with profitable
customers –
• Operative CRM takes care of individual transactions and is used by operational team. Interactions
by customers are kept in the data base and are used later by the service, sales, and marketing
team for operational decisions. In JSM, the staff who is responsible to deal with customer must be
given access to customer’s details including all the information of activities performed earlier. This
will enhance the JSMs’ staff’s efficiency to deal with customer-facing processes in a better way.
• Analytical CRM analyses the data created on the operational side of the CRM effort for evaluation
and prediction of customer behavior. In JSM, analytical CRM can highlight the patterns in
customers’ behavior which will help sale team while pitching the product at JSM.
• Collaborative CRM ensures that information about customer must flow seamlessly throughout
the supply chain, majorly distribution channel; in form of collaborative effort by all associated
department of JSM to increase the quality of services provided to customers. Increase in utility at

customer end will result in increased loyalty. Collaborative CRM comprises interactive
technology like email, digital media to simplify the communications between customers and
staff which would help in building relationships.
Benefits of Customer Profitability Analysis:

(a) It helps the supplier to identify which customers are eroding overall profitability and which customers
are contributing to it.
(b) It can help to provide a basis for constructive dialogue between buyer and seller to improve margins.
Relevance of ‘Customer Profitability Analysis’ in the banking and hotel sector:

Banking Sector: Hotel Sector:
Customer Profitability Analysis helps banks to To improve financial performance, hotel
• retain profitable customers and enhance companies target multiple customer segments by
customer experience by providing different product and service offering. They can
differentiated service or products vary their pricing structure an example could be
• cross sell products to existing customers offering discounts on bulk booking or charging a
• acquire new and profitable customers higher price for a suite in a luxury hotel as
• make pricing determinations. For compared to a similar suite in an economy or
example, waive fees for profitable business travel hotel. Product offerings could
segments while ask for more collateral for differ, providing conference room facility in
customer segments where chance of business hotel versus a spa service in a tourist hotel
default is higher. destination. All this can be aimed at retaining
• migrate customers to more profitable profitable customers through excellent customer
products and services service offering. At the same time, it can also be
used to convert unprofitable customer segments
into profitable ones by cross-selling products and
services. The hotel must be able to differentiate
itself from its competitors based on its customer
service and enhanced customer experience
Part IV – Activity Based Budgeting

Chapter 14 - Case Studies
1. TQM + Six Sigma + Product Life-Cycle [May 2022]

AB Electronics Limited is a well-established manufacturing company manufactures household electronic
gadgets like Air Conditioners, Refrigerators, Washing Machines etc. and almost all types of kitchen
appliances. Company's main motto is to maintain the quality, for the said purpose company follows Total
Quality management (TQM). It is well known for its quality products. In terms of quality, goodwill of the
company is very high. As company never compromises in quality, customers trust in company's product.
Company is also able to charge good prices from customers due to their quality and brand name.
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.
Observations of the expert team are as follows:

1. Products of AB Electronics Limited are not as per latest technology and company is repeatedly
manufacturing the same product since its inception.
2. AB Electronics Limited's products are not based on wireless fidelity technology and not much user
friendly.
3. To maintain the quality and durability AB Electronics Limited uses heavy materials demanding large
space and extra weight.
According to the expert's team:
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

test check. If company manufactures goods with latest technology and according to modem era's need, it
may beat its competitors because of its goodwill and brand name. So, we suggest you to update your
processes and manufacture products with latest technology having easy to use and energy efficient
features.
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.
You are required:

(a) As per strategic position analysis where does the company stand.
(b) DEMONSTRATE the applicability of Six C'S of TQM in AB Electronics Limited.
(c) Give your RECOMMENDATION for implementation of Six Sigma techniques in AB Electronics
Limited.
(d) Currently at which phase of life cycle in AB Electronics Limited product is going on and also LIST
out the uses of product life cycle.
(e) "Change is the law of world." STATE these words in contrast of this situation.
Answer:
Strategic Positioning of AB Electronics Limited:
• AB Electronics Limited is losing its high ranking, established position in the market due to its
inability to keep pace with the impact of technological advances in its product range, now a days
customers desires modern era products with artificial intelligence which is clearly a lack of
understanding the external environment
• In addition, the observations of the expert team state that the products are not up-to-date
technologically which means they are not having abilities, resources or latest skills that enable
them to adopt technology. They obviously failed to invest in resources which are vital for success
in business. However, company is having up to standard working atmosphere and a force of
skilled workers which will make a smooth way for updation of new strategy. Therefore, it is
apparent that current strategy of AB Electronics is not a suitable fit with the strategic position.
Six C’s of TQM:

• Commitment: A company has to be committed to improve quality not just at the operational level,
but all across the organization levels. It is given that AB Electronics Ltd. does not compromise
the quality due to which it has earned the trust of its customers of many years. This is a clear
indication of commitment of AB Electronics Ltd. to quality.
• Culture: A company must encourage individual contributions towards creativity and quality
improvement. AB Electronics Ltd. has been producing good quality goods, has a policy of not
compromising on quality (main motto), which indicates that it has a culture that promotes quality
control.
• Continuous Improvement: Total Quality Management is a process that needs to be monitored
continuously. A company should always seek ways of improving the product. Here, AB
Electronics Ltd. has fallen short, in that it manufactured its products based on outdated
technology.
• Co-operation: Total Employee Involvement and co-operation is paramount to develop
improvement strategies and associated performance measures. It is given that AB Electronics Ltd.
enjoys good internal working atmosphere, workers work as team members and that there are
no issues with the unions. The employees are skilled and hence would be in a position to
contribute towards process improvements where required. This indicates a co-operative and
inclusive working environment
• Customer Focus: Customers are both internal and external customers. Internal customers would
be the employees of the company with whom mutual respect is necessary to preserve employee
morale and employee participation. As mentioned before, AB Electronics Ltd. has a co-operative

and inclusive working environment, hence the internal customer focus is sufficient. External
customers are the consumers of goods and services. AB Electronics Ltd. has focused on quality
and has earned the goodwill and reputation of the customers over many years. However, it has
not kept itself abreast with the current needs of the customers.
• Control: Documentation, procedures and awareness of current best practices are essential for
proper implementation and functioning of TQM. AB Electronics Ltd. already has monitoring
procedures to maintain quality control of its current manufacturing methods. Similarly controls
have to be created to monitor the process and procedures following upgradation of its
manufacturing process.
Six Sigma Implementation:

DMADV and DMAIC are fundamental six sigma methodologies for improving quality of product or
process
DMAIC DMADV
• DMAIC stands for Define, Measure, • DMADV stands for Define, Measure,
Analyze, Improve and Control Analyze, Design and Verify.
(DMAIC). • It is a proactive process where the project
• It is generally used when a product or has strategic importance.
process exists and it needs to be • Multiple processes need to be altered.
improved to align with customer needs. • Consumer behaviour is constantly
• It is generally used in scenarios when changing, as is the competitors’ response to
competitors’ actions are unchanging, this dynamic environment.
customer behaviour is unchanging and • Technology is constantly growing.
the technology is stable. • Hence, products need to be constantly
• Needs of the customers within the improved and upgraded. AB Electronics
market in which the company operates Ltd. operates in such an environment
has changed and is changing constantly. where technology is constantly changing
The competitor’s response is very to suit customers’ needs and hence the
dynamic. Technology is also constantly company can use DMADV to implement
changing to suit customer’s needs. its Six Sigma Methodologies
• In case of AB Electronics Ltd, the
products are outdated and need to be
upgraded substantially to include
modern technology using artificial
intelligence. Hence DMAIC will not be
suitable for implementation at AB
Electronics Ltd
The steps of DMADV include:
• Define the project goal.
• Measure and determine the customer’s needs and specifications.
• Analyze process options to meet the customer’s needs.
• Design the process in detail to meet the customer’s needs.
• Verify the design performance and ability to meet the customer’s needs.
Product Life Cycle:

• The products manufactured by AB Electronics Ltd. are outdated and hence sales have been
declining. Customers’ tastes are constantly changing. Given this, the products are in the Decline
Stage of product life cycle. This is the last stage of product life cycle, where the company would
phase out the products or will sell them in limited quantity to a niche group of customers who still
have a demand for it.
• The uses of product life cycle are as follows (LIST):

o As a Planning tool, it characterizes the marketing challenges in each stage and poses major
alternative strategies, i.e. application of kaizen.
o As a Control tool, the product life cycle concept allows the company to measure product
performance against similar products launched in the past.
o As a Forecasting tool, it is less useful because sales histories exhibit diverse patterns and
the stages vary in duration.
Change in the law of the world:

• AB Electronics Ltd. is a reputed company manufacturing quality products for which it has earned
enormous goodwill from the market. It has been focused on quality and has delivered given the
existing standards of operations within the company. It does spend on quality checks and testing.
• However, the market has been dynamic with changing technology and customer needs. Hence
while quality matters, features also matter. Hence the company has to upgrade its products to
modern era requirements for long term sustainability. The company has to be in constant touch
with these dynamics.
• The latest technical features need to be incorporated into the product. The company has to
constantly keep a tab on the customers’ current needs. They need to proactively take steps to
address these needs and improve the product offering to the customers.
• Unless the company remains nimble to change, the demand for its products is bound to reduce
and eventually the company would have to shut down operations. Hence, “change is the law of
the world”.

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STRATEGIC COST MANAGEMENT CA.

NEW ADDITIONS TO EDITION

BHARADWAJ INSTITUTE (CHENNAI) 1

Summary of additional material released:

Link to download earlier additions:

BHARADWAJ INSTITUTE (CHENNAI) 2

Chapter 2 – Modern Business Environment ....................................................... 4

BHARADWAJ INSTITUTE (CHENNAI) 3

Part I – Total Quality Management

Part II – Business Excellence Models

Part III – Theory of Constraints

1. TOC and Cost of Quality:

BHARADWAJ INSTITUTE (CHENNAI) 4

BHARADWAJ INSTITUTE (CHENNAI) 5

(iv) The cost of poor quality in both the possible cases.

Part (i) – Opportunities and related threats:

Enhanced market demand without the extra cost of advertisement:

Easy Availability of Credit:

Part (ii): Core competencies as critical success factors:

BHARADWAJ INSTITUTE (CHENNAI) 6

Part (iii): Viability of options available:

Particulars Calculation Amount

Part (iv): Cost of Poor Quality:

BHARADWAJ INSTITUTE (CHENNAI) 7

If the defect is discovered at the end of stitching and finishing process:

Further details can be tabled on a requisition basis.

Part IV – Supply Chain Management

Part V – Gain Sharing Arrangement and Outsourcing

2. Gain sharing arrangement and outsourcing [Nov 2022 MTP]

The break-up of cost and other relevant information are as follows:

BHARADWAJ INSTITUTE (CHENNAI) 8

Statement of costs which can be avoided (relevant cost)

BHARADWAJ INSTITUTE (CHENNAI) 9

Reasons - why gain sharing arrangement fails

BHARADWAJ INSTITUTE (CHENNAI) 10

Check-points and measures

BHARADWAJ INSTITUTE (CHENNAI) 11

Part I – Just in Time

1. JIT Implementation [May 2022]

Decision on implementation of Just in Time:

BHARADWAJ INSTITUTE (CHENNAI) 12

Note 1: Stock-out cost analysis:

Factors to be considered for implementation of Just-in-Time System:

Part II – Kaizen Costing

2. Kaizen Costing and 5S:

BHARADWAJ INSTITUTE (CHENNAI) 13

BHARADWAJ INSTITUTE (CHENNAI) 14

Part (ii): Assessment of performance:

Part (iii): Kaizen and 5S:

Part (iv): Tracking of Kaizen Suggestions:

Part (v): Relationship between Kaizen Process and PDCA Cycle:

BHARADWAJ INSTITUTE (CHENNAI) 15

Part (vi): Practices to foster Kaizen Culture:

3. 5S and Balanced Scorecard:

BHARADWAJ INSTITUTE (CHENNAI) 17

Description Reason Can be overcome

BHARADWAJ INSTITUTE (CHENNAI) 18

Part V – Six Sigma

Part VI – BPR Versus PI

BHARADWAJ INSTITUTE (CHENNAI) 19

Re-engineering of accounts payable at SEL:

Part (iii): Criteria to identify the processes

BHARADWAJ INSTITUTE (CHENNAI) 20

Part (iv): Challenges in employing BPR: