Strategic Cost Management

April 2023 Examination

1. A Factory produces 3 types of moulds. While producing, for switching over from one
mould to another, there is a shift-over process involved. Costs incurred are as follows:
Shift-over costs Rs. 50,000

Factory Overheads Rs. 1,00,000/- Packing costs Rs. 20,000/-

Engineering Costs Rs. 30,000/- Supervisor Costs Rs. 10,000/-

Quantity produced A- 1000, B – 2000, C- 4000

Allocate the costs to the 3 moulds (A,B and C) using Traditional Costing method and

Activity Based Costing. Make assumptions as may be needed for cost drivers.

Compare the results and discuss. (10 Marks)

Ans 1.

Introduction

Manufacturing or production can be described as processing parts or raw materials into final
items through equipment, machinery, human labor, and chemical processing.

Manufacturing helps businesses to promote very last or finished goods at a higher price than the
cost of unfinished goods or raw materials. Powerful production techniques enable producers or
producers to take benefit of scale economies, manufacturing more excellent units at a decreased
cost. Large-scale manufacturing units involve products to be produced in huge numbers using
advanced technologies and assembly line processes as core assets.

Production is a huge and critical part of the economy. It consists of refining and processing raw
materials, which includes wood, ore, and foodstuffs, to final products, such as fixtures, metal
items, and processed foods.
A few people focus on production skills, while others offer the funds the production business
needs to buy the substances and gear. Converting those raw materials into something more
efficient provides value. This brought value and raised the charge of completed goods, making
manufacturing a profitable quarter or a part of the business chain.

Concepts and applications

Traditional costing method

Overhead costs- 100000

Cost driver ratio- Total costs/ volume

Mould 1 cost drive= 50000+ 100000+ 20000+ 30000+ 10000/ 1000

= 210000/1000= 210

Mould 2 cost drive= 50000+ 100000+ 20000+ 30000+ 10000/ 1000

= 210000/2000= 105

Mould 3 cost driver cost= 50000+ 100000+ 20000+ 30000+ 10000/ 1000

= 210000/4000= 52.5

Predetermined overhead rate

Mould 1=

Estimated overhead cost/ Cost driver amount= 100000/210

= 476.19

Mould 2

= 100000/105=952.38

Mould 3

= 100000/52.5

= 1904.76
Activity-based costing

Total costs = 210000/1000

Cost driver rate

Mould 1= 210

Mould 2= 105

Mould 3= 52.5

Determining or calculating production expenses or costs for each product are crucial in a firm's
selection-making. For instance, knowing the price to manufacture a unit of the top differs from
how a company budgets to provide that product but is commonly the initial point in figuring out
the sales rate.

An essential detail in calculating the total production charges of an excellent process is the
accurate allocation of overhead. For a few firms, the usually less complex conventional
technique does a good enough process of allocating overhead. However, overhead allocation is
more complicated for numerous merchandise, and activity-based costing is more efficient.

Every other component to consider in calculating which of the two primary overhead allocation
methods is the cost of accumulating and evaluating information. In most instances, the ABC
method is more costly in phrases of other fees and time. While deciding which way to put it into
effect, the company needs to consider its charges, both in money and time.

The difference between the ABC method (using numerous fee drivers) and the traditional
approach (the usage of one value driver) is more complex than the number of cost drivers. While
direct labor is a massive part of the manufacturing expenses, the overhead prices tend to be
continuously directed by one value driver, typically gadget hours or direct labor. The
conventional approach correctly allocates those expenses. When technology is a vast proportion
of the product cost, the overhead costs tend to be directed via diverse drivers, so using a couple
of value drivers inside the ABC technique enables us to a greater precise and accurate allocation
of overhead.

Advantages and disadvantages of the traditional method

Advantages are-

All manufacturing expenses are categorized as labor, material, or overhead assigned to products
irrespective of whether or not they power or are driven by production.

There's the most straightforward one degree of hobby and one overhead cost pool, which
includes direct labor hours, which makes the traditional technique clean and straightforward and
less expensive to maintain.

Disadvantages are-

The usage of the single value driver needs to allocate overhead effectively as the usage of
various value drivers.

Using the single price driver can also bring about overallocated overhead to 1 tremendous and
below-allocated overhead to some other true.

Advantages of activity-based costing system-

There are various overhead pool costs, and it has their specific measure of interest. This provides
more effective rates for enforcing overhead however is extra time-consuming and concludes with
a higher price.

The allocation bases generally differ from those utilized in conventional allocation. Diverse cost
pools help control group expenses encouraged by equal drivers and recall value drivers beyond
the usual labor or machine hour. This results in an extra green overhead application rate.

The activity costs may additionally consider the activity stage at capability rather than the
budgeted activity level.

Conclusion

There are certain disadvantages of using the ABC costing method that control requires to don't
forget when figuring out which shape to apply. Those cons consist of the following-

A few production costs can be excluded from product prices. For instance, the payments to warm
the manufacturing unit can be excluded as a product price because it's far essential for
manufacturing. It only suits one of the sports-driven price pools.
It is extra costly because there's a cost to collect and compare cost driver information and
allocate overhead for multiple price drivers.

An ABC system takes much more time to execute and function, as information on cost drivers
needs to be collected objectively.

2. What is Life Cycle Costing? Explain in brief. What are its Stages? Briefly explain each
stage. What are the 4 stages of a Product Life Cycle?

For each of the following, mention the nature of cost incurred (Low, Medium, High) over
each phase.

Research and Development

Sales Discounts

Maintenance and After Sales service

Advertisements (10 Marks)

Ans 2.

Introduction

Life cycle costing is a method that provides all expenses or prices that a company or character
will incur over the life span of the mission, asset, funding, etc. It involves the initial funding
(non-recurring price) and further investment such as upkeep, operating costs, enhancements, and
restoration.

Life cycle costing is known as whole lifestyle costing. Its purpose is to permit control to
determine whether or not to accumulate an asset or move ahead with a mission. Management
usually evaluates the value of ownership and operating charges and selects the purchase with the
minimum overhead charges.

Benefits of life cycle costing-

It accurately estimates the expenses incurred over the asset's existence duration.
It guarantees that an efficient choice is made based on a reasonable and realistic estimate of
expenses.

It ensures that the control takes predetermined moves to lower non-recurring and ordinary costs.

Concepts and applications

Stages in the product life cycle-

A) Introduction stage- When a product initially launches, sales will typically be low and grow
ultimately. To this degree, the corporation is a small cap as the product is new on the market, and
people are yet to recognize its uses and benefits. This degree needs enormous marketing efforts,
as customers might want more time to test the product. There are no benefits to economies of
scale, as production capacity is not accelerated.

-Research and development- Studies and improvement prices are usually high for this degree.
The company wishes to analyze the marketplace and client needs and preferences and convey
items in step with them.

-Sales discounts- In this stage, a company has to provide heavy sales discounts to capture the
consumer marketplace. As the products are new on the market, customers need to be aware of
their uses and aren't ordinary in buying them. So, to form this addiction, the company ought to
provide heavy income reductions to increase its consumer base.

- Maintenance and after-sales services- This level includes terrible maintenance and after-
income services because the income could be higher. The sales are negligible as the product has
been launched.

- -Advertisements- Advertisements consist of marketing a product or selling it to reach a

maximum variety of people who can be capacity customers. At this level, advertising expenses
are commonly higher than in other ranges.

B) Growth stage- If an employer correctly sells its products for some time and the demand for
its product increases, the product will enter the growth stage. in the growth level, revenue from
sales commonly increases exponentially from the take-off point. Scale economies are found as
sales revenue will increase quicker than expenses and production reaches capacity.
-Research and development- On this degree, the research and development expenses will
continue to be better to look at and examine the alternate in consumer traits and preferences. This
degree is vital in all phases.

-Sales discounts- Sales discounts may be defined as imparting a particular product at distinctly
lower charges to the clients. In this stage, the income discount expenses are much less than in the
initial phase of the introduction stage. The organization has already promoted its product and
built a considerable customer base within the first level.

-Maintenance and after-sales services- On this stage, the upkeep and after-sales charges can be
greater than at the first level because the employer has efficaciously bought its product within the
market using sales discounts and marketing.

-Advertisements- The advertising fee can be higher at this level but much less than in the first
degree.

C) Maturity stage- Eventually, the product market grows to capacity, and the income boom of
the organization's product reduces. At this level, rate discounts and increased promotional efforts
are usual as firms try and capture clients from competitors.

-Research and development- As we mentioned, The R&D expenses are higher in all of the
degrees of a product cycle. The organization continually desires to incur expenses on R&D
charges to live ahead of its competitors.

-Sales discounts- At this stage are commonly higher. as the marketplace has come to an area
where the company's growth has stopped, it needs to capture customers from its competition. At
this level, the weaker companies are eliminated from the market.

Maintenance and sales services- On this stage, the company's renovation and after-income
services expenses are higher. As time passes and the corporation grows, its sales boom, and the
need to provide after-income services to its clients increases.

-Advertisements- As we discussed above, at this level, the organization again needs to offer
more sales reductions to attract customers. Similarly, the company should market its product
closely to increase its sales.
D) Decline stage- In this degree, sales of the product fall, and profitability shrinks. This is
generally because of the market access to other substitute or innovative products that fulfill
patron desires better than modern products.

-Research and development- Incurring R&D costs is essential at this level. As product sales are
declining, the company needs to research and develop strategies to increase its customer base
and profits.

-Sales discounts- In this level, the employer has to pay attention to providing durable products to
its customers to increase their trust.

- Maintenance and after-sales services costs- These costs are relatively lower than the second
and the thirst degrees in this level. As income declines, the want to offer after-sales services also
decreases.

-Advertising costs- As mentioned above, the enterprise ought to best recognize imparting
healthy and durable merchandise to its clients in preference to spending hefty expenses on
advertising and different marketing techniques.

Conclusion

As noted in the query, we discussed a product existence cycle. Its ranges and all of the elements
referred to within the question include research and development costs, marketing costs, sales
bargain costs, and after-sales services costs.

3. a. Following are the Budgeted figures of PQR Ltd.

Particulars UoM
Raw Material 50
Wages 10
Direct Expenses 20
Fixed Overheads Rs. 100000
Variable Overheads 10
Selling & Distribution Expenses 3 20 % is Fixed
 Administrative Expenses Rs. 50000
Sales Price Rs. Per unit 130

Capacity of the Factory is 10000 units. However due to Covid, the production capacity for
the year was reduced to 80%.

Prepare a Budget for the factory in Normal and Covid situation. (5 Marks)

Ans 3a.

Introduction

Covid-19 became a tough time for factories and manufacturing units. There were lockdowns all
over the international, and people could not keep their production activities. Although
manufacturing sports continued after the lockdowns, the environment was no longer equal. As
worldwide flights were not flying, the imported raw cloth was expensive due to much less
delivery.

Concepts and applications

During normal time

Sales price per unit= 130

Production capacity= 1000

Total income= 50*1000=50000

Wage= 10/unit

Total wage expense= 10*10000

=100000

Direct expenses= 20/unit

Total= 20*10000

=200000
Fixed overheads= 100000

Variable overheads= 10/unit

Total= 10*10000

=100000

Selling and distribution expenses= 3/unit

Total= 3*10000

=30000

Administrative expenses= 50000

Total expenses= 50000+100000+200000+100000+30000+50000

=530000

Budget surplus= Total income- Total expenses

= 1200000-530000

670000

Covid situation

Units produced=10000*80/100=8000

Total income= Sale price*units produced

= 130*8000

=10, 40,000

RAW MATERIAL= 50/UNIT

Total= 50*8000

=400000

Wages=10/unit

Total=10*8000
=80000

Direct expenses=20/unit

Total= 20*8000

=160000

Fixed overheads= 100000

Variable overheads=10/unit

Total= 10*8000

=80000

Selling and distribution expenses+3/unit

Total=3*8000

=24000

Administrative expenses= 50000

Total expenses= 894000

Budget surplus= Total Income-Total expenses

=1040000-894000

=146000

Conclusion

Before covid, the world became normal, and businesses ran easily. There was good client
demand as humans had been fearless in spending. The covid and non-covid situations were
completely one of a kind.

However, on the other hand, Covid has changed the scenario. The business scene has no longer
been modified, and there needs to be more demand, due to which businesses and marketers face
massive troubles.
3b. With the following information, prepare the Budgeted Profit for the year for Company
XYZ.

UoM A B C
No. of Units Nos. 20 30 40
Sales Price Rs./Unit 100 50 25
Variable Costs Rs./Unit 40 20 5
Fixed Costs Rs. 1,80,000

Assuming that the mentioned production numbers are at 100% capacity, under what
situation would XYZ ltd. create a flexible budget (suggest any one). What benefit would it

provide to the management of the company? (5 Marks)

Ans 3b.

Introduction

The term budget may be described as an estimation of expenses and revenue over a certain
destiny period and is usually compiled and re-evaluated periodically. Budgets may be planned
for any company that desires to spend money, including businesses, governments, families, and
people at any earnings degree.

A budget is crucial to managing our monthly costs, preparing for life's uncertain events, and
affording pricey objects without going into debt. Preserving track of how lots we earn and spend
does now not struggle does not need us to be top at math, and does not imply we cannot buy the
things we need. It means that we can understand where we spend our cash and better manage our
prices.

Concepts and applications

Product A

No of units=20

Sales=100
Income=100*20

=2000

Variable costs=40*20

=800

Fixed costs= 60000

Total revenue=2000-800

=1200

Product B

No of units= 30

Sales price= 50

Income=50*30

=1500

Variable cost= 20*30

=600

Revenue=1500-600

=900

Product C

No of units= 40

Sales price25

Income=25*40

=1000

Variable cost= 5*40

=200
Revenue= 1000-200

=800

Total income from A+B+C= 1200+900+800

=2900

Budget deficit= 2900-180000

=177100

A budget deficit can be defined as a situation in which the expenses of the firm increase more
significantly than its sales. Even though governments typically use it, this could be extensively
carried out for businesses and individuals.

In other words, a budgetary deficit is when the person, business, or authorities' budgets have
more costs or charges than the income they generate as revenue.

An economic deficit can be defined because of the total excess costs over the whole income,
apart from the yearly borrowings. Moreover, this can be defined as the quantity the business,
person, or authorities needs to borrow to meet all expenses.

The extra the financial deficit, the greater the liabilities might be. Fiscal deficit allows us to
understand the government's shortfall while incurring expenditures without a scarcity of funds.

Conclusion

Sales expenses are the extra of total sales prices over the total profits. In different words, the
shortfall of income receipts compared to the sales prices is known as the sales deficit.

The revenue deficit tips economists that the profits earned by the government need to be
increased to fulfill the wishes of the expenditures needed for critical government capabilities.