Assignment

ADVANCE
MANAGEMENT
ACCOUNTANCY

MRADUL GOYAL
070138
ABOUT THE COMPANY

VIP MILK FOODS is a dairy food processing company which is engaged in manufacturing
of premium quality milk products like paneer, ghee, cream, butter, etc. Our current market for
dairy products is Delhi, Hyderabad, and Bangalore and we are planning to further expand it
to states like Maharashtra, and eastern part of Uttar Pradesh.

CHALLENGES FACED

1. HIGH COMPETETION– There are large number of competitors in the market and to
compete with one needs to be cost efficient. In order to gain a competitive edge in
the market, we need to provide our products at a cheaper price in the market which
could only be achieved through cost cutting. Although we claim our quality to be
superior in the market but price factor is very significant in getting a hold in the
market in the initial stage.

2. MINIMUM RETURN ON INVESTMENT- Establishment of plant and machinery

requires a big investment and since the credit cycle period is of 30 days, the working
capital requirement rises with rise in production. This increases the uncertain factor
of risk and also assuring a certain minimum return on this investment becomes a
major challenge.

3. INVENTORY MANAGEMENT- Since most of the dairy products have a life span of less
than 7 days, it is very important to manage the inventory effectively so that damage
of the products can be prevented and quality can be maintained. We need to make
sure that production cycle is managed in such a manner that only viable inventory is
left on a daily basis. Also the market demand is sometimes unprecedented, so
sufficient inventory must be available to meet the demand. Maintaining this balance
is key challenge in operations.

4. CAPITAL REQUIREMENT- Since a large amount of capital has to be invested, it needs

to acquire through alternative sources. But acquiring capital will increase the burden
of cost of capital that needs to be adjusted from the profits earned implying a cut in
profit. Decision involving a choice of these credit sources can effect business
significantly. Selecting the credit source with the least expenditure is a challenge that
I faced in the initial stage.

ACCOUNTING CONCEPTS APPLICABILITY IN SOLVING THE CHALLENGES

1. DIFFERENTIAL ANALYSIS- In order to meet the competitive cost, we need to cut our
input cost. For this, the concept of differential analysis, i.e Buy or Make concept is
useful in analysing the alternative cost difference in making and buying our raw
material. We can compare the cost of manufacturing of raw material with the cost of
procuring it and in case the former is lesser, we will manufacture the raw material,
 provided the resources are available. For instance, the price of procuring milk from
milk contractors is 40 rupees per litre and if we maintain our own centres in distant
villages through VMC’s, the cost comes down to 39.25 rupees per litter. The
difference of 0.75, which is a significant figure in bulk manufacturing, will help us in
cut our product cost implying greater margin. This will lead us in gaining a
competitive edge as now we can sell our products at a lower price in the market.

2.