Q1.

Year Repackage Reformulate cumulative cf.

0 ($3,000,000) ($25,000,000)
1 20,000,000 10,000,000 20,000,000
2 1,250,000 9,000,000 21,250,000
(a) To plan the appropriate strategy company should analyze all the situation and option
available to it. Those project which is generating positive cash flows and rank
substantially over other in the coming future should be accepted. What strategy will you
plan to take an appropriate decision?
(b) Based on the Payback period method Repackage ranks 1 st which is able to generate a
project investment in the starting of 3 months only.
(c) NPV of the both the project is coming positive but if we compare both we find that
Repackage option gives more NPV than the Reformulated option.
NPV=-Co+∑PVCF

(d) Based on IRR option of Repackaging gives IRR of 573% which is quite high.

NOTE: Internal Rate of Return for an investment proposal is the discount rate that equates the
present value of the expected net cash flows (CFs) with the initial cash outflow. If the initial cash
outflow or cost occurs at time “zero”, it is represented by that rate, IRR such that

This means that the Net present value in the case of IRR = “zero” or Present value of project
cash flows = original investment at the beginning of the project.

(e) All the method yielding the same result and ranking in the all the method is coming same.
This because of Repackaging is dominating the Reformulate too much in terms of
payback and rate of return generated. Probably this is due to the very low investment
required by it.

Q2.
 (a) Balanced scorecard helps the organization to measure the organizational performance by
the way of various perspective i.e. traditionally performance of the organization was
measured on the basis of financial basis. Now in modern time BSC has introduced the
non financial measure also to evaluate the performance which is a company relationship
with the customer, key internal processes and learning and growth. When performance
measures for these areas are added to the financial metrics, the result is not only a broader
perspective on the company’s health and activities; it’s also a powerful organizing
framework. Organization can measure the performance simply building the balance
scorecard for the activities that it wants to measure. These 10 steps could be followed to
measure the performance, building the business case, identifying the strategies,
identifying the tactical objectives, identifying performance measurements, identifying
data sources for calculating the measurements, creating a data warehouse to supply the
data, selecting information technology to create the data warehouse, creating the balanced
scorecard report, managing the strategy using the balanced scorecard, and refining the
tactical objectives in support of the strategy

(b)

Components of Balance Scorecards

1. Financial Perspective: The importance of financial considerations is paramount in most

situations and in most organizations. For any strategic choice, therefore, the timely and
accurately presented funding data is critical and the sources of funding and budgeting
must be done. Another key consideration is the prospects of sustainability of funding for
the initiative required to implement the strategy. This component of the Balanced
Scorecard therefore looks at the projects from a financial perspective and discusses
financial considerations.

2. Customer Perspective: This area focuses on what must be done and what's most
important, from the customer's perspective, to achieve the mission. The importance of
customer focus and customer satisfaction has gained considerable importance in recent
management philosophy. The increased competition in the markets means that it is easier
than ever for the dissatisfied customers to switch suppliers. The objectives, measures,
targets and, eventually activities are therefore planned to implement strategy regarding
the customer satisfaction

3. Internal Process Perspective: This component focuses on what an organization must be

doing well to meet the customer needs defined in the Customer Perspective. It also lets
managers know how well their business is running and how well the internal processes
are designed to meet the objectives. These may be divided into: a) mission-oriented
processes and b) support processes. Specific measures and benchmarks are then set to
monitor their effectiveness
 4. Learning & Growth Perspective: This perspective focuses on how an organization is
improving its ability to innovate, improve and learn in order to support success with the
critical operations and processes defined in the Internal Process Perspective. This may
include employee training and corporate culture attitudes. In the modern management
philosophy, it is increasingly becoming important for the organizations to develop a
culture of learning where the employees constantly learn and share the knowledge to
facilitate growth. The on-the-job training and mentoring is also an essential component of
the perspective

(c)

Important points

 The balanced scorecard relies on four processes to bind short term activities to long term
objectives that are Translating the vision, Communicating and linking, Business
planning, and Feedback and learning

 The balanced scorecard supplemented traditional financial measures with criteria that
measured performance from 3 additional perspectives-those of customers, internal
business processes, and learning and growth.

 Communicating the balanced scorecard promotes commitment and accountability to the

business’s long term strategy.

 The balance scorecard supplies three elements that are essential to strategic learning.
First, it articulates the company’s shared vision, defining in clear and operational terms
the results that the company, as a team, is trying to achieve. Second, the scorecard
supplies the essential strategic feedback system. Third, the scorecard facilitates the
strategy review that is essential to strategic learning.

 The BSC provides a framework for managing the implementation of strategy while also
allowing the strategy itself to evolve in response to changes in the company’s competitive
market and technological environment.

(d)
Author said in the article that it is easy to implement for any organization but it is not so the
Balanced Scorecard has well-known implementation problems. Implementers of the Balanced
Scorecard find they end up with too many measures in the tangible parts of their scorecard, not
enough measures in less tangible parts of their scorecard, and altogether not measuring
meaningful results.

Another point of criticism is that The Balanced Scorecard doesn't put enough emphasis on results
versus strategies. Most people express their strategies as vague, jargon rich actions, and struggle
to tease out the specific and tangible results implied by these strategies. So they measure what is
easy to measure: progress against planned activity, the reaching of milestones and whatever else
they have data for. The measures focus on activities like "develop target markets" and "upgrade
staff competencies", not outcomes.

The Balanced Scorecard doesn't offer the steps to measure design-Bordering on prescriptive, the
Balanced Scorecard literature offers ideas for measures to use, for specific strategies typical of
each of the four perspectives. Functionality. Brand Image. Relationship. But these terms mean
such different things to different organizations and people, so to measure them meaningfully
takes more thought than brainstorming or copying from a book. It takes a thinking process that
extends from an intimate understanding of the result that needs measuring and this often requires
climbing out of mental ruts like "this isn't measurable" and "we don't have the data".

Q3. (a)

Management by exception means that the manager's attention should be directed toward those
parts of the organization where plans are not working out for reason or another. Time and effort
should not be wasted focusing on those parts of the organization where things are going
smoothly. If all goes according to plans, there will be little difference between actual results and
the results that would be expected according to the budgets and standards. If this happens,
managers can concentrate on other issues. However, if actual results do not conform to the
budget and to standards, the performance reporting system sends a signal to the management that
an "exception" has occurred. This signal is in the form of a variance from the budget or
standards.

However, are all variances worth investigating? The answer is no. Differences between actual
results and what was expected will almost always occur. If every variance were investigated,
management would waste a great deal of time tracking down nickel-and-dime differences.
Variances may occur for any of a variety of reasons - only some of which are significant and
warrant management attention. For example, hotter than normal weather in the summer may
result in higher than expected electrical bills for air conditioning. Or, workers may work slightly
faster or slower on a particular day. Because of unpredictable random factors, one can expect
that virtually every cost category will produce a variance of some kind.

Costs of production are affected by internal factors over which management has a large degree
of control. An important job of executive management is to help the members of various
management levels understand that all of them are part of the management team. Standard costs
and their variances are an aid to keeping management informed of the effectiveness of
production effort as well as that of the supervisory personnel. Supervisors who often handle two
thirds of three fourth of the dollar cost of the product are made directly responsible for the
variance which, show up as materials variances (price, quantity, mix, and yield) or as direct labor
variances (rate and efficiency). Materials and labor variances can be computed for each materials
item, for each labor operation, and for each worker. Factory overhead variances (spending,
controllable, idle capacity, volume, and efficiency) indicate the failure or success of the control
of variable and fixed overhead expenses in each department.

Variances are not ends in themselves but springboards for further analysis, investigation, and
action. Variances also permit the supervisory personnel to defend themselves and their
employees against failures that were not their fault. A variance provides the yardstick to measure
the fairness of the standard, allowing management to redirect its effort and to make reasonable
adjustments. Action to eliminate the causes of undesirable variances and to encourage and
reward desired performance lies in the field of management, but supervisory and operating
personnel rely on the accounting information system for facts which facilitate intelligent action
toward the control of costs.

(b)

Benchmarking is the process of comparing one's business processes and performance metrics to
industry bests and/or best practices from other industries. Dimensions typically measured are
quality, time, and cost. Improvements from learning mean doing things better, faster, and
cheaper.

Benchmarking involves management identifying the best firms in their industry, or any other
industry where similar processes exist, and comparing the results and processes of those studied
(the "targets") to one's own results and processes to learn how well the targets perform and, more
importantly, how they do it.

The three main types of costs in benchmarking are:

 Visit Costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labor
time.
  Time Costs - Members of the benchmarking team will be investing time in researching
problems, finding exceptional companies to study, visits, and implementation. This will
take them away from their regular tasks for part of each day so additional staff might be
required.
 Benchmarking Database Costs - Organizations that institutionalize benchmarking into
their daily procedures find it is useful to create and maintain a database of best practices
and the companies associated with each best practice now.

One example where benchmarking is used is Rank Xerox. Rank Xerox is part of Xerox Corp.
who found itself in trouble when its market share went down fifty percent in 1980. Competitors
were moving into the market and beating them out in price and quality. Xerox decided to
benchmark such things as how their photocopiers were built, the cost of each state of production,
selling costs, and service quality against both competitors and any other firms that it could learn
from. Benchmarking is an everyday activity for Xerox and Rank Xerox. Their guiding principle
is: “Anything anyone else can do better, we should aim to at least do equally well”. Their
distribution was compared against such companies as 3M in Dusseldorf, Ford in Cologne, Volvo
in Gothenburg and IBM’s international warehouse and French warehouse. By comparing
With these best in class firms, Xerox was able to discover that warehouses were not efficient
through a high level of automation but rather through efficient manual routines. Among many
other findings, they also realized that they needed to update their systems because they took one
extra day in information flow between the field and center. Through benchmarking, Xerox was
able to improve its financial position, stabilize its market share, and increase customer
satisfaction by forty percent in the past four years.

In the above example Xerox has increased its market share by benchmarking to its competitors
and improved its market share. To measure current Performance Company should compare with
its previous year performance i.e. its current performance should be better than previous year.
But market doesn’t remain same as company can’t operate in the blue ocean or highly
competitive for a long period of time. As there may be chances of slump in the economy or
introduction of new technology that may affect the company profitability. So performance of the
company is pretty subjective, main thing is that whether company is able to improve its
performance and reduce cost as it were before benchmarking. If company is able to do that it
means company has benchmarked its process. As benchmarking a process is not easy it involved
various types of cost which is mentioned above, company has to do proper cost benefit analysis
before initiating the benchmarking process.

Q4. (a)

2 RO
(i) EOQ = √ C
R=Annual Requirement of raw material

O= ordering cost

C= carrying cost

R=40000 O=120 C=.26*10=2.6

2∗40000∗120
√ 2 .6 = 1921 yards (approx)

(ii) No. of orders= annual demand/EOQ

=40,000/1921

=20.83 or 21 orders

(iii) Reorder point= demand per day/ lead time for new order

Demand per day= 40000/250=160 yards

=160*3 = 480 yards

(iv) Steps in computing cost of prediction error are:

 Compute the monetary outcome from the best action that could have been taken, given
the actual amount of the cost input.
 Compute the monetary outcome from the best action based on the incorrect amount of the
predicted cost input.
 Compute the difference between the monetary outcomes from Steps 1 & 2.

(b)

Backflush costing varies from traditional costing systems in that it does not track costs in order;
instead it delays the recording of certain costs. The process used in backflush costing
complements just-in-time (JIT) inventory systems by making the process of costing simpler. This
type of costing system may be used to complement activity-based costing for the same reason.
Although there are many variations of backflush costing, this type of costing generally eliminates
the work-in-process account that is generally associated with most types of costing. Due to this
and other variations from traditional costing methods, backflush costing may not be consistent
with generally accepted accounting principles (GAAP), due to the fact that in most stages it may
undervalue the inventory.

The procedures in backflush costing may vary greatly from company to company, as there are
various forms of this costing that can be used. Backflush costing may eliminate work-in-process
accounts and instead flush all of the costs back at the end of the production run being costed.
Backflush costing may also record raw materials at a standard cost when they are purchased,
while recording conversion costs at their actual costs. Backflush costing is also used by
eliminating the finished goods inventory account and instead recognize the finished goods at the
point of sale.

Q5. (a)

(b)

Company is following the product differentiation strategy as we can see that company is overall
not concerned in reducing the cost of the product. It is charging cost not on the basis of
production
but
of
2008 on the basis
capacity.
Also
that 1. Quantity of AZ-101 200 we can see
company

produced and sold charged

higher
a

selling price
in
2009
2. Selling Price $40,000 the year
compared to
2008 which
clearly shows that company want to dominate the market on the basis of product not by reducing
the prices.

(c) Hamadi should include Customer strategy that concentrates on creating value and
differentiation from that of the competitors because company is charging premium prices to its
customer so customer expect great value for their money

(d)

2008 2009
1. Quantity of AZ-101 200 210
produced and sold
2. Selling Price $40,000 $42,000

(e)

It can be seen that company has increased its selling price by 5% which led to the increase in the
profit by around 43%. The reason behind the huge increase in the profit is due to the increase in
the no. of quantity sold and decrease in the certain cost like customer service cost reduced by 6%
over the previous year.