Analysis of Case Study: Inexperience

Para. Problem No. 1 Need for Cost Projection or Prediction: Revenue predictions are possible through accurate productivity measurement techniques and systems. But are there systems available for cost measurement and control? Need for maintenance of cost accounting records To understand the cost of each finished product there should be system to maintain cost records of all raw materials.

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Likely Source Of Missing Information

What are the available cost tracking and measurement systems available in MGPM manufacturers

Information is supplied only about system available for profit projection at MGPM.

This information is Internal cost accounting provided in the text. process and manuals at MGPM

What are the per-unit costs of raw materials used: cotton and wool? What are the volumes of raw materials used per unit finished product? What are the costs of ready-for-sale handicraft items?

Information is supplied only about the type of raw materials

This information is Various accounts and provided in the text. Ledgers. Cost accounting reports and records.

Para. Problem No. 3 Need for rational allocation of costs to measure productivity of individual functions At MGPM there is an urgent need to ascertain the causes of the financial losses. This requires analysis of costproductivity and profitability of all departments

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Rational procedure to determine: - The proper breakup of costs. - Measure of cost per unit output. - Cost variation trends. - Methods for controlling costs.

The rational procedure for cost allocation involves: - Identification of cost objects, cost centers and cost units - Planning of cost allocation, apportionment and absorption in a scientific manner.

Jaswinder Singh, Friend of Mr. Joginder Marwah

Missing information about understanding of processes and techniques for scientific analysis and allocation of costs can be retrieved from cost accounting books and manuals as well as experienced cost accountants.

Comparison and Justification of costs allocated to individual functions In order to understand if an individual function is cost-productive, MGPM needs tools to analyze and justify the costs incurred Explanation and justification of the costs incurred at each function Function wise distribution of common costs incurred as a percentage of the total cost Joginders Study of costs at MGPM To analyze and compare the costs incurred at a function: comparison can be done with industry benchmark costs. Likely

by each function

source of such information can be competitor survey /intelligence and expert advice.

Accurate measurement of per unit cost of product In order to achieve rational pricing of a product and reduce the significant costs involved in making a product, measurement of unit cost is important For every product detailed costs involved are needed including raw material, labour, machine etc. For Handicrafts: 50% of cost is raw material cost, 30% is salary and labour cost, 5% is machine cost This information is Techniques and methods provided in the text. are needed to accurately distribute common costs: like utilities, storage, transportation costs etc. among all products per unit. This information can be retrieved from standard cost accounting manuals.

Comparison of costs of alternative production methods To evaluate two alternative production methods based on the per unit raw material costs for the two alternatives To compare costs of two alternative production methods: accurate data about the amount of raw materials involved in the 2 alternatives and per unit cost of these Cost of Pasting Material:Alternative 1: 225*Wt + 5000-200 Alternative 2: 425*Wt Therefore, if Weight of paste used at MGPM is more than 24 Kg, then alternative 1 is cheaper. Else alternative 2 is cheaper. This information is The actual amount of provided in the text. pasting material used at MGPM is not known: this figure can be retrieved if appropriate raw material usage records are maintained in all functions.

raw materials is needed. 7 Comparing in-house production cost versus outsourcing cost To evaluate proposals of outsourcing production for some of the products as compared to in-house production To evaluate proposal of getting production of a product outsourced, accurate estimate of costs incurred with inhouse production should be available Using electronic components from ME reduces warranty repair costs by 99.5%. New components from ME are costlier by Rs. 17.43. Additional fixed cost for machines required = Rs. 5000 Saving on selling existing machine to Mahavir Handicrafts = Rs. 575. This information is The percentage of provided in the text. warranty repairs carried out on dancing puppets, average amount of the rework costs and amount charged per unit by Mahavir Handicrafts for assembling need to be determined to evaluate the proposal. This information would be part of records of customer care department that handles repairs.

Identifying variation in fixed and variable product costs as scale of production and inventory varies To identify whether increase in costs are in proportion to increased To identify whether increasing the production scale Due to increased production: Electircity bill has increased, New unskilled workers and supervisor This information is The information required provided in the text. for this can be found in inventory accounts, salary

production and to accurately identify inventory costs.

results in decrease in average costs: data is needed showing QoQ increase in production, increase in variable cost (utility, labour, raw material) and change in inventory level.

are hired, and raw material cost has increased. WIP and finished goods inventory has also increased.

accounts, raw materials accounts, inventory accounts and sales accounts

Projection of cash flow and liquidity and estimation of user cost of capital To accurately estimate that enough cash will be available for operations throughout the year even though sales may vary considerably. How much working capital will be made available by sales over the operation cycle and how much debt needs to be raised In the first and second quarters sales are projected to fall by 8%. In the third and fourth quarters sales are projected to grow at a compounded rate of 38%. 86% of the yearly export sales happen in December. Capital is needed for operations as well as for buying new warehouse. There will be a quarterly loss of interest money @ Rs. 7,50,000 if MGPMs own funds are used. This information is To accurately know the provided in the text. working capital required for operations: a system is needed to accurately accumulate all costs data and predict the expected quarterly operations costs. This system can be any SAP system applied in the company. This system should also be able to estimate quarterly capital requirements and costs of alternate sources of capital.

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Selection of appropriate product mix to maximize profit margin and optimizing cost of raw materials used To determine whether to continue production of low margin products. To identify and minimize all controllable costs used in these products What is the amount of cost savings and effect on sales of other products if production of jewellery boxes is discontinued? What needs to be done regarding inputs used exclusively by discontinued products? The margins on jewellery boxes are lower than those on other products. Sales of other products may be adversely affected if jewellery box production is stopped. Margins on jewellery boxes can be improved by reducing the quantity of raw materials used getting sourcing them at lower prices This information is Improvement in margins provided in the text. on jewellery boxes by varying costs and amounts of raw materials can be evaluated through SAP system. If jewellery box production is stopped, alternative uses of the fixed and sunk costs associated with them must be planned using Master Production system.

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Selection of appropriate raw material processing methods so as to yield more of higher value items. To determine optimal raw material processing methods that yield more of higher valued items. Segregation of skills possessed by labour so as The detailed cost analysis of each step involved in processing raw jute is needed. The market value of three types 20% cost saving is possible with new jute processing method. The 3 types of jutes will be produced in the ratio 30:40:30. If labour specializes in few standard activities it is easier to allocate This information is provided by craftsman Gopal. Detailed cost data of various sub operations of jute processing can again be obtained from appropriate SAP/cost management system. Data

to easily allocate labour costs to different products.

of processed jutes is needed to apportion the jute processing costs. Data is needed for time spend by all labour according to the task performed and the product on which it is perfomed.

labour costs to different products.

of labour time spent on an activity per product must be available through the time-sheet system in the company.

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To determine the batch size and sales price of orders to be fulfilled so that the order is profitable To find minimum quantity and price of premium items to be supplied to emporiums under a special order so that the order is profitable. It is needed to find the appropriate cost of a unit product when fulfilling a special batch/order. Also based on the cost, appropriate price to be quoted is to be found. For the special order a minimum margin of 55% is expected. The costs to be added in the product cost include material cost, labour cost, overhead expenses, interest charges @12% for internally generated funds used in manufacturing products, notional warehouse rent and notional salary of the owner. This information is Through the SAP system, provided in the text. profit analysis calculation for fulfilling an order must be possible. For example: min value of n can be found by Selling Price >= 1.55 x (average variable cost + total overhead cost/n)